**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

# **Washington,D.C. 20549**

# ** **

# **FORM 10-K**

 

**(MarkOne)**
| **x**                                                | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                 |
| **For the fiscal year ended February 29, 2008** |
|                                                 |       |                                                                                                     |
| **OR**                                               |
|                                                 |       |                                                                                                     |
| o                                                    | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thetransition period from          to           .**

 

**Commission file number: 0-4957**

 

**EDUCATIONAL DEVELOPMENT CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **73-0750007**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

| **10302 East 55th Place, Tulsa, Oklahoma** | ** ** | **74146-6515** |
|--------------------------------------------|------------|----------------|
| (Address  of principal executive offices)  |       | (Zip  Code)    |

 

Registrant’s telephone number, including area code **(918)622-4522**

 

Securities registered pursuant to Section 12(b) ofthe Act:  **None**

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

**CommonStock, $.20 par value**

(Titleof class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

| Yes  o |   | No  x |
|------------------|--------|-----------------|

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.

| Yes  o |   | No  x |
|-------------|--------|-----------------|

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

| Yes  x |   | No  o |
|------------------|--------|-----------------|

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of thischapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)

| Yes  o |   | No  x |
|------------------|--------|-----------------|

 

The aggregate market value of the votingshares held by non-affiliates of the registrant at the price at which thecommon stock was last sold on August 31, 2007, on the Nasdaq NationalMarket was $24,427,200.

 

As of May 19, 2008, 3,816,235 shares ofcommon stock were outstanding.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

Portions of the Proxy Statementfor fiscal year 2008 relating to our Annual Meeting of Shareholders to be heldon July 29, 2008 are incorporated by reference into Part III of thisReport on Form 10-K.

 

 

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TABLE OF CONTENTS

 
| FACTORS AFFECTING FORWARD  LOOKING STATEMENTS |                                                                                                                |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                |   |
| PART I                                   |                                                                                                                | 3 |
|                                          |                                                                                                                |   |
| Item 1.                                       | Business                                                                                                            | 3 |
|                                          |                                                                                                                |   |
| Item 1A                                       | Risk Factors                                                                                                        | 5 |
|                                          |                                                                                                                |   |
| Item 1B                                       | Unresolved Staff Comments                                                                                           | 6 |
|                                          |                                                                                                                |   |
| Item 2.                                       | Properties                                                                                                          | 6 |
|                                          |                                                                                                                |   |
| Item 3.                                       | Legal Proceedings                                                                                                   | 6 |
|                                          |                                                                                                                |   |
| Item 4.                                       | Submission of Matters to a  Vote of Security Holders                                                                | 7 |
|                                          |                                                                                                                |   |
| PART II                                  |                                                                                                                | 7 |
|                                          |                                                                                                                |   |
| Item 5.                                       | Market For Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities | 7 |
|                                          |                                                                                                                |   |
| Item 6.                                       | Selected  Financial Data                                                                                            | 8 |
|                                          |                                                                                                                |   |
| Item 7.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 9 |
|                                          |                                                                                                                |   |
| Item 7A.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 22 |
|                                          |                                                                                                                |   |
| Item 8.                                       | Financial  Statements and Supplementary Data                                                                        | 22 |
|                                          |                                                                                                                |   |
| Item 9.                                       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 22 |
|                                          |                                                                                                                |   |
| Item 9A.                                      | Controls and  Procedures                                                                                            | 23 |
|                                          |                                                                                                                |   |
| Item 9B.                                      | Other Information                                                                                                   | 23 |
|                                          |                                                                                                                |   |
| PART III                                 |                                                                                                                | 23 |
|                                          |                                                                                                                |   |
| Item 10.                                      | Directors  and Executive Officers of the Registrant                                                                 | 23 |
|                                          |                                                                                                                |   |
| Item 11.                                      | Executive  Compensation                                                                                             | 23 |
|                                          |                                                                                                                |   |
| Item 12.                                      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 24 |
|                                          |                                                                                                                |   |
| Item 13.                                      | Certain  Relationships and Related Transactions                                                                     | 24 |
|                                          |                                                                                                                |   |
| Item 14.                                      | Principal  Accounting Fees and Services                                                                             | 25 |
|                                          |                                                                                                                |   |
| PART IV                                  |                                                                                                                | 25 |
|                                          |                                                                                                                |   |
| Item 15.                                      | Exhibits,  Financial Statement Schedules                                                                            | 25 |

 

2

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**Part 1**

 

**FORWARD LOOKING STATEMENTS**

 

*This report contains statementsthat are forward-looking.  You shouldread the following discussion in connection with our financial statements,including the notes to those statements, included in this document.  These forward-looking statements are nothistorical facts but are expectations or projections based on certainassumptions and analyses made by our senior management in light of theirexperience and perception of historical trends, current conditions, expectedfuture developments and other factors. Actual events and results may be materially different from anticipatedresults described in such statements.*

 

*Our ability to achieve suchresults is subject to certain risks and uncertainties which are not currentlyknown to us.  We caution you not to placeundue reliance on these forward-looking statements, which speak only as of thedate that they are made.  We do notundertake any obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the date ofthis report.*

 

**Item 1.****          ****BUSINESS**

 

(a) *General Development ofBusiness*

 

Educational DevelopmentCorporation (“EDC”) is the exclusive United States trade publisher of the lineof educational children’s books produced in the United Kingdom by UsbornePublishing Limited (“Usborne”).  We wereincorporated on August 23, 1965. Our fiscal years end on February 28(29).

 

Our company motto is “Thefuture of our world depends on the education of our children.  EDC delivers educational excellence one bookat a time.  We provide economicopportunity while fostering strong family values.  We touch the lives of children for alifetime.”

 

*(b)  Financial Informationabout Industry Segments*

 

While selling children’sbooks is our only line of business, we sell them through two divisions:

 

·                  Home BusinessDivision (“Usborne Books at Home” or “UBAH”) - This division distributes booksnationwide through independent consultants who hold book showings in individualhomes, and through book fairs, direct sales and Internet sales.  The UBAH Consultants also distribute thesetitles to school and public libraries.

 

·                  PublishingDivision (“Publishing”) – This division markets books to bookstores (includingmajor national chains), toy stores, specialty stores, museums and other retailoutlets throughout the country.

 

Percent Net Revenues byDivision

 
| ** **     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| Publishing     |       | 27       | %          | 26       | %          | 26       | %          |
| UBAH           |       | 73       | %          | 74       | %          | 74       | %          |
| Total revenues |       | 100      | %          | 100      | %          | 100      | %          |

 

*(c)  Narrative Descriptionof Business*

 

*Products*

 

As the sole United Statestrade publisher of the Usborne line of books, we offer over 1,400 differenttitles.  Many are interactive in nature,including our Touchy-Feely board books, jigsaw puzzle books, activity andflashcards, adventure and search books, art books, sticker books and foreignlanguage books. Many titles are also published in Spanish.

 

3

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We have a broad line of ‘internet-linked’books which allow readers to expand their educational experience by referringthem to relevant non-Usborne websites. Our books include science and math titles, as well as chapter books andnovels.

 

We also produce anddistribute “Usborne Kid Kits”, which combine an Usborne book with specialtyitems/toys that complement the information contained in the book.  The Kid Kits are packaged in reusable vinylbags or box packages.  Currently, 60different Kid Kits are available.

 

We continually introduce newtitles across all lines of our products.

 

UBAH markets the booksthrough commissioned consultants using a combination of direct sales, homeparties, book fairs and the Internet. The division had approximately 7,900 consultants in 50 states at February 29,2008.

 

Publishing markets throughcommissioned trade representatives who call on book, toy, specialty stores andother retail outlets, as well as through in-house marketing by telephone to thetrade.  This division markets to approximately5,100 book, toy and specialty stores. Significant orders totaling 32% of the Publishing Division’s sales havebeen received from major book chains. During fiscal year 2008, the division continued to expand into massmerchandising outlets such as drug, department and discount stores.

 

*Seasonality*

 

Sales for both divisions aregreatest during the Fall due to the holiday season.

 

*Competition*

 

We face competition on twofronts for our UBAH Division from several other larger direct selling companies- for sales and consultants.  Our schooland library market faces strong competition from Scholastic Books for the bookfair market.

 

Publishing faces strongcompetition from large U.S. and international companies.  Industry sales of juvenile paperbacks approached$1.4 billion annually for calendar year 2007. Historically, this division’s sales are approximately 1.0% of industrysales.  Competitive factors includeproduct quality, price and deliverability. Management believes its product line will enable this division tocompete well in its market area.

 

*Employees*

* *

As of April 1, 2008, 76full-time and 3 part-time employees worked at our Tulsa facility, about half ofthose are in the assembly facility or distribution warehouse.  We believe our relations with our employeesare good.

 

*Company Reports*

 

Our annual and quarterly reports (Forms 10-K and 10-Q), current Form 8-K reports and amendments to those reports filed with the SEC are available for download from the Investor Relations portion of our Internet website at *www.edcpub.com*.

 

4

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**Item 1A. RISK FACTORS**

 

*Investors should carefullyconsider the following risks in addition to the other information contained inthis report.  Each of these factors couldadversely affect our business, operating results and financial condition.  In addition, these factors could adverselyaffect the value of an investment in our common stock.*

 

Our operations may be adversely affected by general economic conditions

 

General economic factorsthat are beyond our control impact our forecasts and actual performance. Thesefactors include interest rates, recession, inflation, consumer creditavailability, consumer debt levels, energy costs, tax policy changes,unemployment trends, the threat of war, terrorism or other political unrest,and other matters that influence consumer confidence and spending.  Volatility in financial markets may causethese factors to change with a greater degree of frequency and magnitude.  Changes in the economic climate couldadversely affect our performance.

 

Our growth is dependent upon attracting and retaining independent salesconsultants

 

Our continued growth andsuccess in UBAH is dependent on our ability to attract and retain salesconsultants, their ability to operate their businesses successfully and torecruit other sales consultants. To attract and retain new sales consultants,we provide operational manuals and sales materials, participate in regional andnational training seminars, offer low-cost start-up opportunities, provide avariety of sales incentives and pay competitive sales commissions andbonuses.  These sales consultants areindependent business owners and we have no control over the time and effort eachindividual consultant chooses to spend on their business.

 

Our business faces a great deal ofcompetitive pressure

 

The retail business is highly competitive.  We compete for sales consultants with manyother direct selling companies, most of whom offer products different from ourproducts.  Most of these competitors havea greater market presence and larger financial resources.  Unanticipated changes in the pricing andmarketing practices of these competitors may adversely affect the performanceof UBAH.

 

The Publishing Division operates in a highlycompetitive market.  The PublishingDivision is in direct competition with other booksellers, the majority of whichhave larger financial resources than we have. The book industry is a $25 billion market.  Sales in the juvenile paperback market, ourprimary market, were approximately $1.4 billion for calendar year 2007.  Our market share in the juvenile paperbackmarket was less than 1.0% in fiscal year 2008. Unanticipated changes in the pricing and marketing practices of thesecompetitors may adversely affect the performance of our Publishing Division.

 

Seasonality of sales

 

Our business is subject toseasonal influences, with a higher portion of sales and income historicallyrealized during the third quarter of the fiscal year, which includes theback-to-school and holiday seasons.  Thisseasonality causes our operating results to vary somewhat from quarter toquarter and could materially and adversely affect the market price of oursecurities.

 

Our operations are dependent on a single distribution facility

 

Our distribution activitiesfor all books are handled from a single facility in Tulsa, Oklahoma.  Any significant interruption in the operationof the distribution facility due to natural disasters, accidents, systemfailures or other unforeseen causes could impair our ability to distributemerchandise to our customers.

 

5

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We have a sole source supplier for our products

 

We are the exclusive UnitedStates distributor for the line of children’s books published by UsbornePublishing, Limited, London, UK and our distribution of other publishers’products is extremely limited.  There issome risk in having a sole source for our products.  The contract between Usborne Publishing,Limited and us has a two-year notice of termination requirement.  However, we have an excellent workingrelationship with our foreign supplier Usborne Publishing, Limited and canforesee no reason for this to change.

 

All our products are imported from overseas locations

 

Our products are printed atlocations throughout Europe, China, Singapore, India, Malaysia and Dubai.  The products are then shipped by ocean cargoto the United States.  Political unrestin a particular location could cause delays in securing products.  However, since our supplier has numeroussources for printing the products, should political unrest occur in one area,the supplier could utilize printers in other locations to provide ourproduct.  Should an accident occur whilethe books are in transit and the supply of a title be depleted as a result, wewould experience lost sales.

 

Our common stock is thinly traded

 

Our common stock is tradedon the NASDAQ market under the symbol EDUC. There were 3,706,745 shares outstanding at February 29, 2008.  The average shares traded daily for thefiscal years ended February 29, 2008, February 28, 2007, and February 28,2006 were 3,790 shares, 3,021 shares, and 3,371 shares, respectively.

 

Personnel changes

 

Our development has largelybeen achieved through the vision and efforts of our President and CEO.  If his services were not available for anyreason, our business could be adversely affected.

 

Other factors may negatively affect our business

 

The foregoing list of riskfactors is not exclusive.  Other factorsand unanticipated events could adversely affect us.  We do not undertake to revise anyforward-looking statement to reflect events or circumstances that occur afterthe date the statement is made.

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

None

 

Item2.    PROPERTIES

 

We are located at 10302 E.55th Pl., Tulsa, Oklahoma.  Thesefacilities are owned by us and contain approximately 105,000 square feet ofoffice and warehouse space.  All product distributionsare made from this warehouse.  We believethat our operating facility meets both present and future capacity needs.

 

Item3.    LEGAL PROCEEDINGS

 

We are not a party to anymaterial pending legal proceedings.

 

6

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Item4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matterssubmitted during the fourth quarter of fiscal year 2008 covered by this reportto a vote of our security holders.

 

### PART II

 

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The common stock of EDC istraded on the NASDAQ National Market (symbol—EDUC).  The high and low closing quarterly commonstock quotations for fiscal years 2008 and 2007, as reported by the NationalAssociation of Securities Dealers, Inc., were as follows:

 
| ** ** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|
| **Period** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| 1st Qtr    |       | 8.58     |       | 7.18     |       | 8.85 |   | 6.86 |   |
| 2nd Qtr    |       | 8.44     |       | 5.85     |       | 7.90 |   | 6.10 |   |
| 3rd Qtr    |       | 7.28     |       | 5.30     |       | 7.88 |   | 6.24 |   |
| 4th Qtr    |       | 6.59     |       | 5.19     |       | 7.88 |   | 6.50 |   |

 

The number of shareholdersof record of EDC’s common stock at May 9, 2008 was 743.

 

We paid a $0.22 per shareannual dividend during fiscal year 2008 and a $0.20 per share annual dividendduring fiscal year 2007.  We paid a $0.30per share annual dividend and a $0.10 per share special dividend (total $0.40per share) on May 19, 2008 to shareholders of record as of May 9,2008.

 

Thefollowing table shows repurchases of our Common Stock which we made during thefourth quarter of fiscal year 2008.

 

ISSUERPURCHASES OF EQUITY SECURITIES

 
| **Period**                 | ** ** | **Total # of Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total # of Shares  Purchased as  Part of Publicly  Announced Plan (1)** | ** ** | **Maximum # of  Shares that May  be Repurchased  under the Plan** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
|                       |       |                                            |       |                                             |       |                                                                                                              |       |                                                                                                 |       |
| December 1 - 31, 2007 |       | 51,648                                          |       | $                                                | 5.71       |                                                                                                              | 51,648     |                                                                                                 | 82,370     |   |
| January 1 - 31, 2008  |       | 0                                               |       | $                                                | 0.00       |                                                                                                              | 0          |                                                                                                 | 82,370     |   |
| February 1 - 29, 2008 |       | 5,859                                           |       | $                                                | 5.42       |                                                                                                              | 5,859      |                                                                                                 | 79,000     |   |
| Total                      |       | 57,507                                          |       | $                                                | 5.68       |                                                                                                              | 57,507     |                                                                                                 | 76,511     |   |

 

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(1)  In April 2004the Board of Directors authorized us to purchase up to 500,000 additionalshares of our common stock under a plan initiated in 1998.  This plan has no expiration date.

 

7

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Item 6.  SELECTED FINANCIAL DATA

 

Thefollowing selected financial data for the five years ended February 29,2008 should be read in conjunction with our consolidated financial statementsand the related notes and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, included in Item 7 of this Report.

 

YEARS ENDED FEBRUARY 28 (29)

 
| ** **                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Net Revenues                              |       | $        | 30,520,700 |     | $          | 31,403,500 |       | $        | 31,788,900 |     | $          | 31,650,800 |   | $ | 31,127,300 |   |
|                                      |       |     |       |     |       |       |       |     |       |     |       |
| Earnings from Operations                  |       | $        | 2,324,400  |     | $          | 2,407,100  |       | $        | 2,398,400  |     | $          | 2,406,100 |   | $ | 2,373,500 |   |
| Earnings from Operations Per Common Share |       |     |       |     |       |       |       |     |       |     |       |
| Basic                                     |       | $        | 0.62       |     | $          | 0.64       |       | $        | 0.64       |     | $          | 0.62 |   | $ | 0.60 |   |
| Diluted                                   |       | $        | 0.60       |     | $          | 0.62       |       | $        | 0.62       |     | $          | 0.59 |   | $ | 0.55 |   |
|                                      |       |     |       |     |       |       |       |     |       |     |       |
| Total Assets                              |       | $        | 20,055,000 |     | $          | 19,701,900 |       | $        | 18,397,900 |     | $          | 17,980,500 |   | $ | 19,112,700 |   |
|                                      |       |     |       |     |       |       |       |     |       |     |       |
| Cash Dividends Paid Per Common Share      |       | $        | 0.22       |     | $          | 0.20       |       | $        | 0.15       |     | $          | 0.12 |   | $ | 0.10 |   |

 

8

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Item 7.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

# ***MD&A contains statements that areforward-looking and include numerous risks which you should carefullyconsider.  Additional risks and uncertaintiesmay also materially and adversely affect our business.   You should read the following discussion inconnection with our financial statements, including the notes to thosestatements, included in this document. Our fiscal years end on February 28 (29).***

# ** **

# **Management Summary**

# ** **

Educational DevelopmentCorporation is the sole distributor in the United States of the Usborne line ofchildren’s books.  We operate twoseparate divisions, Publishing and Usborne Books at Home (“UBAH”), to sellthese books.  Our Corporate headquarters,including the distribution facility for both divisions, is located in Tulsa,Oklahoma.

 

These two divisions eachhave their own customer base.  ThePublishing Division markets its products on a wholesale basis to various retailaccounts.  The UBAH Division markets itsproducts to individual consumers as well as to school and public librariesthrough direct-selling consultants.

 

**PublishingDivision**

 

The Publishing Divisionoperates in a market that is highly competitive, with a large number ofcompanies engaged in the selling of books. Sales in the book industry were approximately $25 billion for calendaryear 2007.  Sales in the trade industry,defined as wholesale sales to retailers, were approximately $8.5 billion forcalendar year 2007.  Sales in thejuvenile paperback market, our primary market segment, were approximately $1.4billion for calendar year 2007.  Ourmarket share in the juvenile paperback market has remained between 0.9% and1.0% during the last three years.

 

The Publishing Division’scustomer base includes national book chains, regional and local bookstores, toyand gift stores, school supply stores and museums.  To reach these markets, the PublishingDivision utilizes a combination of commissioned sales representatives locatedthroughout the country and a commissioned telesales group located in ourheadquarters.  The Vice President of thePublishing Division manages sales to the national chains.

 
| ** **            | ** ** | **Publishing Division Sales by Market Type** | ** ** |
|-----------------------|------------|-----------------------------------------------------------------------|------------|
| ** **            | ** ** | **FY 2008**                                                      | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** |
| National chain stores |       | 32                                                                    | %          | 39 | % | 42 | % |
| All other             |       | 68                                                                    | %          | 61 | % | 58 | % |
| Total net sales       |       | 100                                                                   | %          | 100 | % | 100 | % |

 

The Publishing Division usesa variety of methods to attract potential new customers and maintain currentcustomers.  Company personnel attend manyof the national trade shows held by the book selling industry each year,allowing us to make contact with potential buyers who may be unfamiliar withour books.  We actively target thenational chains through joint promotional efforts and institutional advertisingin trade publications.  The Publishing Division also participates with certain customersin a cooperative advertising allowance program, under which we pay back up to2% of the net sales to that customer. Our products are then featured in promotions, such as catalogs, offeredby the vendor.

 

Wemay also acquire, for a fee, an end cap position in a bookstore (our productsare placed on the end of a shelf), which in the publishing industry isconsidered an advantageous location in the bookstore.  The costs of these promotions have beenclassified as reductions in revenue in the statements of earnings.

 

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ThePublishing Division’s in-house telesales group targets the smaller independentbook and gift store market.  Duringfiscal year 2008 the telesales group opened 364 new accounts.  Our semi-annual, full-color, 130-page catalogs,are mailed to over 5,000 customers and potential customers.  We also offer two display racks to assiststores in displaying our products.  Thelarger rack has adjustable shelves that can hold approximately 250 titles.  The second rack is four-sided with threelevels that will hold between 50 and 60 of our Kid Kits.

 
| ** **   | ** ** | **Net Revenues for Publishing Division** | ** ** | ** **       | ** ** |
|--------------|------------|--------------------------------------------------------------|------------|------------------|------------|
| ** **   | ** ** | **FY 2008**                                             | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** |
| Net Revenues |       | $                                                            | 8,144,100  |             | $          | 8,121,100 |   | $ | 8,403,700 |   |
|              |            |                                                              |            |                  |            |  |  |  |  |  |

 

Publishing Division’s netrevenues increased $23,000 in fiscal year 2008 from fiscal year 2007, or0.3%.  Net revenues were up 3% for insidesales and 7% for smaller retail sales, offset by a decrease of 7% for nationalchain stores.  Sales for fiscal year 2007were 3.3% lower than 2006.

 

**UsborneBooks at Home (“UBAH”) Division**

 

The UBAH Division is amulti-level selling organization that markets its products through independentsales representatives (“consultants”) located throughout the UnitedStates.  The customer base of UBAHconsists of individual purchasers, as well as school and public libraries.  Revenues are generated through home shows,direct sales, Internet sales, book fairs and contracts with school and publiclibraries.

 

 An important factor in the continued growth ofthe UBAH Division is the addition of new sales consultants and the retention ofexisting consultants.  Current activeconsultants recruit new sales consultants. UBAH makes it easy to recruit by providing low-cost signing kits.  For one month, kits containing sampleproducts and supplies were free to new recruits when a minimum dollar home showwas submitted by the new recruit.  UBAHprovides an extensive handbook that is a valuable tool in explaining thevarious programs to the new recruit.

 

Consultants During Year

 
| ** **                                       | ** ** | **FY 2008** | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** |
|--------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| New Sales Representatives                        |       | 5,500            |       | 7,200            |       | 5,300            |       |
| Active Sales Representatives End of Fiscal  Year |       | 7,900            |       | 9,800            |       | 8,100            |       |

 

The UBAH Division presentlyhas six levels of sales representatives:

 

·                  Consultants

·                  Supervisors

·                  SeniorSupervisors

·                  ExecutiveSupervisors

·                  SeniorExecutive Supervisors

·                  Directors

 

Upon signing up, eachindividual is considered a consultant. Consultants receive commissions from each sale they make; the commissionrate being determined by the marketing program under which the sale ismade.  In addition, consultants receive amonthly sales bonus once their sales reach an established monthly goal.  Consultants who recruit other consultants andmeet certain established criteria are eligible to become supervisors.  Upon reaching this level, they receivemonthly override payments based upon the sales of their downline groups.

 

Once supervisors reach certainestablished criteria, they become senior supervisors and are eligible to earnpromotion bonuses on their consultants. Once senior supervisors reach certain established criteria, 

 

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they become executive supervisors, seniorexecutive supervisors or directors. Executive supervisors and higher may receive an additional monthlyoverride payment based upon the sales of their downline groups.

 

Percent of Net Revenues by UBAH Marketing Program

 
| ** **                                      | ** ** | **FY 2008** | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** |
|-------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| Home Shows                                      |       | 39               | %          | 42               | %          | 46               | %          |
| Direct Sales                                    |       | 3                | %          | 3                | %          | 3                | %          |
| School & Library, including Book  Fair |       | 36               | %          | 36               | %          | 36               | %          |
| Internet                                        |       | 11               | %          | 8                | %          | 5                | %          |
| Transportation Revenue                          |       | 11               | %          | 11               | %          | 10               | %          |
| Totals                                          |       | 100              | %          | 100              | %          | 100              | %          |

 

Numberof Orders by UBAH Marketing Program

 
| ** **                | ** ** | **FY 2008** | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| Home Shows                |       | 33,900           |       | 36,200           |       | 37,000           |       |
| Direct Sales              |       | 6,500            |       | 7,700            |       | 9,000            |       |
| School & Library |       | 11,700           |       | 12,000           |       | 12,100           |       |
| Internet                  |       | 47,800           |       | 40,900           |       | 27,400           |       |
|                      |       | 99,900           |       | 96,800           |       | 85,500           |       |

 

Net revenues from home showsdeclined 9% or $668,800 during fiscal year 2008.  This was a combination of per order averageswhich were down 3.0% and a lower number of orders placed during fiscal year2008.  Homes shows were the originalmarketing program when UBAH began in 1989 and continue to generate the greatestpercentage of revenue for UBAH. Consultants contact individuals (“hostesses”) to hold book shows intheir homes.  The consultant assists thehostess in setting up the details for the show and makes a presentation at theshow and takes orders for the books.  Thehostess earns free books based upon the total sales at the show.  Customer specials are available for customerswhen they order a selected amount. Additionally, home shows provide an excellent opportunity for recruitingnew consultants.

 

Net revenues from directsales declined 13% or $58,700 during fiscal year 2008.  This resulted from a 15% decrease in thenumber of orders placed during the year, offset by a 2% increase in the perorder average.  Direct sales are saleswithout a hostess being involved.  Thisprogram makes it possible for consultants to work directly out of their homesby selling to friends, neighbors and other customers.  It is especially convenient for thoseindividuals who wish to order books from a consultant but are unable to attenda home show.  TheUBAH Division offers many promotions (customer specials) throughout theyear.  These promotions offer thecustomer the opportunity to purchase selected items at a discount if thecustomer meets the defined criteria.  Thediscounts under these promotions are recorded in discounts and allowances.

 

The school and librarymarketing program, including book fairs, decreased 1% or $81,900 during fiscalyear 2008.  The number of orders placedduring the year was down 2% while the per order average increased 2%.  Scholastic continues to dominate the bookfair market.  Our book fair program iscomparable to Scholastic’s program.  Manyschools hold joint book fairs with UBAH and our competitors and we do well at theseevents.  In many cases, UBAH book fairshave been the only participant.  We lookforward to future growth in this market area as our book fair program gainswider acceptance.

 

11

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School and library sales arerestricted to consultants who have received additional, specialized trainingwhich allows them to sell to schools and libraries.  The UBAH consultant is the only source that alibrary or school has for library-bound Usborne books.  They are not available through any of theschool supply distribution companies.

 

Book fairs can be held withalmost any organization as the sponsor. The consultant provides promotional materials to acquaint parents withthe books.  Parents turn in their ordersat a designated time.  The book fairprogram generates free books for the sponsoring organization.  UBAH also has a *Reach for the Stars* fundraiser program.  This is a pledge-based reading incentiveprogram that provides cash and books to the organization and books for thechildren.

 

As shown in the tablesabove, internet sales continue to show significant growth for UBAH, increasing28% or $381,900 during fiscal year 2008. This is the result of more consultants utilizing in-house-developed and hostedweb sites in their businesses for a nominal monthly fee.  Consultants can customize the web sites totheir own particular needs or they can maintain the generic site.  Orders are transmitted to us through ashopping cart arrangement and the consultant receives sales credit andcommission on the sales.  Web-onlyspecials are changed frequently and have proved successful, contributing to thegrowth in this market.

 

The cost of free booksprovided under the various UBAH marketing programs is recorded as operating andselling expense in the statements of earnings.

 

We believe that the UBAHDivision has the greatest growth potential for us.  While there are many multi-level companies inthe United States, UBAH is the only one exclusively selling books.  We believe this is a fertile market withexcellent opportunities for continued growth. The keys to future growth in the UBAH Division is recruiting andretaining consultants.

 

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**(1-2) Liquidity and Capital Resources**

 

EDChas a history of profitability and positive cash flow.  We can continue to grow with minimaladditional capital requirements.  Our primarysource of cash is generated from operations. Our primary uses of cash are to pay dividends, acquire treasury stock,purchase property and equipment, and repay borrowings on our line ofcredit.  We utilize our bank creditfacility to meet our short-term cash requirements, when needed.

 

We expect our ongoing cashflow to continue to exceed cash required to operate the business.  Consequently, we expect short-term borrowingsto remain at a minimum during the current fiscal year.

 

During fiscal year 2008 weexperienced a positive cash flow from operations of $2,511,500.  Cash flow from operations was increased by adecrease in inventories of $569,400 and an increase in income taxes payable of$56,200, offset by a decrease in accounts payable and accrued expenses of$828,900.

 

Cash used in investingactivities was $136,900 for capital expenditures related to replacing thebuilding and warehouse roof, new warehouse equipment, computers and variouswarehouse improvements. We estimate that cash used in investing activities forfiscal year 2009 will be less than $500,000. This would consist of software and hardware enhancements to our existingdata processing equipment, property improvements and additional warehouseequipment.

 

Cashused in financing activities was $1,188,600 which was primarily due to dividendpayments of $826,000 and $504,900 paid to acquire treasury stock.  These were offset by cash received fromfinancing activities of $82,300 from the sale of treasury stock and $60,000from the exercise of stock options.  In September 2002,the Board of Directors authorized paying a minimum annual cash dividend of 20%of net earnings.  In fiscal years 2008,2007 and 2006 we paid 36%, 31% and 31%, respectively, of net earnings as a cashdividend.  We anticipate that in futureyears we will continue paying cash dividends of 25% - 35% of net earnings.

 

OurBoard of Directors adopted a stock repurchase plan in which we may purchase upto an additional 500,000 shares as market conditions warrant.  Management believes the stock is undervaluedand when stock becomes available at an attractive price, we can utilize freecash flow to repurchase shares. Management believes this enhances the value to the remainingstockholders and that these repurchases will have no adverse effect on ourshort-term and long-term liquidity.

 

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**(3) Resultsof Operations**

 
| Earnings  as a Percent of Net Revenues | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | **FY 2008** | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** |
| Net revenues                           |       | 100.0            | %          | 100.0            | %          | 100.0 | % |
| Cost of sales                          |       | 35.2             | %          | 35.9             | %          | 36.6 | % |
| Gross margin                           |       | 64.8             | %          | 64.1             | %          | 63.4 | % |
| Operating expenses:                    |       |             |       |             |       |   |   |
| Operating & selling           |       | 24.3             | %          | 23.6             | %          | 22.3 | % |
| Sales commissions                      |       | 23.4             | %          | 23.6             | %          | 23.7 | % |
| General & administrative      |       | 5.4              | %          | 5.8              | %          | 5.4 | % |
| Interest                               |       | 0.0              | %          | 0.0              | %          | 0.3 | % |
| Total operating expenses               |       | 53.1             | %          | 53.0             | %          | 51.7 | % |
| Income from Operations                 |       | 11.7             | %          | 11.1             | %          | 11.7 | % |
| Other income                           |       | 0.5              | %          | 1.2              | %          | 0.3 | % |
| Earnings before income taxes           |       | 12.2             | %          | 12.3             | %          | 12.0 | % |
| Income taxes                           |       | 4.6              | %          | 4.7              | %          | 4.5 | % |
| Net earnings                           |       | 7.6              | %          | 7.6              | %          | 7.5 | % |

 

***Fiscal Year 2008 Compared withFiscal Year 2007***

 

The following presents anoverview of our results of operations for the years ended February 29,2008 and February 28, 2007.  We hadearnings before income taxes of $3,732,100 for fiscal year 2008 compared with$3,878,100 for fiscal year 2007.

 

## Revenues

 
| ** **                           | ** ** | ** **       | ** ** | ** **       | ** ** | **$ Increase/** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|----------------------|------------|
| ** **                           | ** ** | **FY 2008** | ** ** | **FY 2007** | ** ** | **(decrease)**       | ** ** |
| Gross sales                          |       | $                | 40,600,300 |             | $          | 41,920,700           |       | $ | (1,320,400 | ) |
| Less discounts & allowances |       | (11,806,700      | )          | (12,358,800      | )          | 552,100              |       |
| Transportation revenue               |       | 1,727,100        |       | 1,841,600        |       | (114,500             | )          |
| Net revenues                         |       | $                | 30,520,700 |             | $          | 31,403,500           |       | $ | (882,800 | ) |

 

The UBAHDivision’s gross sales decreased 9.4% or $1,379,700 during FY 2008 whencompared with FY 2007.  This decrease isattributable to lower sales in the home party, direct sale market, and schooland library/book fair market, offset by increased sales in the internetmarkets.  Average sales per order forthis division were down 6.5%, while the overall number of orders was up 2.4%primarily due to additional internet sales orders.  The Publishing Division’s gross salesincreased 0.4% or $59,300 during FY 2008 when compared with FY 2007.

 

ThePublishing Division’s discounts and allowances are a much larger percentage ofgross sales than discounts and allowances in the UBAH Division due to thedifferent customer markets that each division targets.  The Publishing Division’s discounts andallowances were $8.7 million in both fiscal years 2008 and 2007.  To becompetitive with other wholesale book distributors, the Publishing Divisionsells at discounts between 48% and 55% of the retail price, based upon thequantity of books ordered and the dollar amount of the order.  The Publishing Division’s discounts andallowances were 51.8% of Publishing’s gross sales in both fiscal year 2008 and2007.

 

The UBAH Division’s discounts and allowanceswere $3.1 million in fiscal year 2008 and $3.7 million in fiscal year 2007.  Mostsales in the UBAH Division are at retail. As a part of the UBAH 

 

14

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Division’s marketing programs, discountsbetween 40% and 50% of retail are offered on selected items at various timesthroughout the year.  The discounts andallowances in the UBAH Division will vary from year to year depending upon themarketing programs in place during any given year.  The UBAH Division’s discounts and allowanceswere 13.0% of UBAH’s gross sales in fiscal year 2008 and 14.6% in fiscal year2007.

 

Transportation revenues decreased $114,500 infiscal year 2008 consistent with the decrease in sales during the year.

 

## Expenses

 
| ** **                        | ** ** | **FY 2008** | ** ** | **FY 2007** | ** ** | **$**      | ** Increase/  (decrease)** | ** ** |
|-----------------------------------|------------|------------------|------------|------------------|------------|------------|---------------------------------|------------|
| Cost of sales                     |       | $                | 10,750,200 |             | $          | 11,274,600 |                            | $          | (524,400 | ) |
| Operating & selling      |       | 7,424,500        |       | 7,509,400        |       | (84,900    | )                               |
| Sales commissions                 |       | 7,137,600        |       | 7,397,800        |       | (260,200   | )                               |
| General & administrative |       | 1,653,100        |       | 1,722,900        |       | (69,800    | )                               |
| Interest                          |       | —           |       | 7,600            |       | (7,600     | )                               |
|                              |       |             |       |             |       |       |                            |
| Total                             |       | $                | 26,965,400 |             | $          | 27,912,300 |                            | $          | (946,900 | ) |

 

Cost of sales decreasedapproximately 4.7% in fiscal year 2008 when compared with fiscal year2007.  Our cost of products is 25% to 34%of the gross sales price, depending upon the product.  In comparing the percentage change in grosssales with the percentage change in cost of goods, consideration must be givento the mix of products sold. Approximately 85% of ourproducts come from one vendor, where the cost of the products is a fixedpercentage of the retail price.  The mixof products sold has not materially changed in recent years.

 

Weexpect the percentage change in year-to-year gross sales and the percentage changein year-to-year cost of sales to be proportional.  The 4.7% decrease in cost ofsales for fiscal year 2008 over fiscal year 2007 is relatively consistent withthe percent decrease in gross sales of approximately 3.1% for the same periods.

 

Costof sales is the inventory cost of product sold (including the cost of theproduct itself and inbound freight charges). Operating and selling expenses include purchasing and receiving,inspection, warehousing, and other costs of our distribution network.  These costs totaled $1,132,000 in FY2008 and$1,200,800 in FY2007.  When comparing ourgross margins with the gross margins of other companies, note that we do notinclude the costs of our distribution network in our cost of sales.

 

In addition to costs associated with our distribution network(noted above), operating and selling costs include expenses of the PublishingDivision, the UBAH Division and the order entry and customer servicefunctions.  Operatingand selling expenses as a percentage of gross sales were 18.3% and 17.9% forfiscal year 2008 and fiscal year 2007, respectively.

 

Salescommissions in the Publishing Division increased $25,900 for the fiscal yearended 2008.  Sales commissions for thisdivision fluctuate depending upon the amount of sales made to our “houseaccounts,” which are our largest customers and do not have any commissionexpense associated with them, and sales made by the Company’s outside salesrepresentatives.  Publishing Divisionsales commissions are paid on net sales and were 1.7% of net sales in fiscalyear 2008 and 1.4% of net sales in fiscal year 2007.

 

Salescommissions in the UBAH Division decreased $287,000.  UBAH Division sales commissions are paid onretail sales and were 36.3% for fiscal year 2008 and 31.3% for fiscal year2007.  

 

15

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The fluctuation in thepercentages of commission expense to retail sales is the result of the type ofsale.  Home shows, book fairs, school andlibrary sales and direct sales have different commission rates.  Also contributing to the fluctuations in thepercentages is the payment of overrides and bonuses, both dependent onconsultants’ monthly sales and downline sales. The decrease in sales commissions is the result of lower sales in theUBAH Division.

 

General and administrativeexpenses include the executive department, accounting department, informationservices department, general office management and building facilitiesmanagement.  General and administrative expenses as apercentage of gross sales were 4.1% for both fiscal years 2008 and 2007.

 

The tax provision for fiscalyear 2008 was $1,407,700.  The effectiverate for fiscal year 2008 was 37.7% and for fiscal year 2007 was 37.9%.  Our effective tax rate is higher than theFederal statutory rate due to state income taxes.

 

***Fiscal Year 2007 Compared withFiscal Year 2006***

 

The following presents anoverview of our results of operations for the years ended February 28,2007 and 2006.  We had earnings beforeincome taxes of $3,880,100 for fiscal year 2007 compared with $3,814,400 forfiscal year 2006.

 

## Revenues

 
| ** **                           | ** ** | ** **       | ** ** | ** **       | ** ** | **$ Increase/** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|----------------------|------------|
| ** **                           | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** | **(decrease)**       | ** ** |
| Gross sales                          |       | $                | 41,920,700 |             | $          | 42,567,700           |       | $ | (647,000 | ) |
| Less discounts & allowances |       | (12,358,800      | )          | (12,367,800      | )          | 9,000                |       |
| Transportation revenue               |       | 1,841,600        |       | 1,589,000        |       | 252,600              |       |
| Net revenues                         |       | $                | 31,403,500 |             | $          | 31,788,900           |       | $ | (385,400 | ) |

 

The UBAH Division’sgross sales decreased a slight 0.2% or $43,300 during FY 2007 when comparedwith FY 2006.  We attribute this decreaseto lower sales in the home party, direct sale market, and school andlibrary/book fair market, offset by increased sales in the internetmarkets.  Average sales per order forthis division were down 8.9%, while the overall number of orders was up 13.3%primarily due to additional internet sales orders.  The Publishing Division’s gross salesdecreased 3.5% or $603,700 during FY 2007 when compared with FY 2006.

 

ThePublishing Division’s discounts and allowances are a much larger percentage ofgross sales than discounts and allowances in the UBAH Division due to thedifferent customer markets that each division targets.  The Publishing Division’s discounts andallowances were $8.7 million and $9.0 million in fiscal years 2007 and 2006,respectively.  To be competitive with other wholesale book distributors, thePublishing Division sells at discounts between 48% and 55% of the retail price,based upon the quantity of books ordered and the dollar amount of theorder.  ThePublishing Division’s discounts and allowances were 51.8% of Publishing’s grosssales in both fiscal year 2007 and 2006.

 

The UBAH Division’s discounts and allowances were$3.7 million in fiscal year 2007 and $3.4 million in fiscal year 2006.  Mostsales in the UBAH Division are at retail. As a part of the UBAH Division’s marketing programs, discounts between40% and 50% of retail are offered on selected items at various times throughoutthe year.  The discounts and allowancesin the UBAH Division will vary from year to year depending upon the marketingprograms in place during any given year.  The UBAH Division’s discounts and allowanceswere 14.6% of UBAH’s gross sales in fiscal year 2007 and 13.4% in fiscal year2006.

 

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Transportationrevenues increased $252,600 in fiscal year 2007 due to an increase in thetransportation rate charged to the UBAH Division.

 

## Expenses

 
| ** **                         | ** ** | **FY 2007** | ** ** | **FY 2006** | ** ** | **$ Increase/  (decrease)** | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|----------------------------------|------------|
| Cost of  sales                     |       | $                | 11,274,600 |             | $          | 11,651,200                       |       | $ | (376,600 | ) |
| Operating &  selling      |       | 7,509,400        |       | 7,095,000        |       | 414,400                          |       |
| Sales  commissions                 |       | 7,397,800        |       | 7,526,200        |       | (128,400                         | )          |
| General &  administrative |       | 1,722,900        |       | 1,712,500        |       | 10,400                           |       |
| Interest                           |       | 7,600            |       | 83,100           |       | (75,500                          | )          |
| Total                              |       | $                | 27,912,300 |             | $          | 28,068,000                       |       | $ | (155,700 | ) |

 

Cost of sales decreased approximately 3.2% infiscal year 2007 when compared with fiscal year 2006.  Our cost of products is 25% to 34% of thegross sales price, depending upon the product. In comparing the percentage increase in gross sales with the percentageincrease in cost of goods, consideration must be given to the mix of productssold.  Themix of products sold has not materially changed in recent years.

 

We expectthe percentage change in year-to-year gross sales and the percentage increasesin year-to-year cost of sales to be proportional.  The 3.2% decrease in cost ofsales for fiscal year 2007 over fiscal year 2006 is relatively consistent withthe percent decrease in gross sales of approximately 1.5% for the same periods.

 

Cost ofsales is the inventory cost of product sold (including the cost of the productitself and inbound freight charges). Operating and selling expenses are made up of purchasing and receivingcosts, inspection costs, warehousing costs, and other costs of our distributionnetwork.  These costs totaled $1,200,800in FY2007 and $1,414,900 in FY2006. Readers are advised to be cautious when comparing our gross margins withthe gross margins of other companies, since some companies include the costs oftheir distribution networks in cost of sales.

 

In addition to costsassociated with our distribution network (noted above), operating and sellingcosts include expenses of the Publishing Division, the UBAH Division and theorder entry and customer service functions. Operating and selling expensesincreased $414,400 primarily due to higher postage and freight expenses of$103,500 over the prior year, increases in travel contest incentives and othersales incentives offered by the UBAH Division totaling $108,300, higher promotioncosts in the Publishing Division totaling $89,400 and an increase inpayroll/benefits costs of $100,500. Operating and selling expenses as a percentage of gross sales were 17.9%and 16.7% for fiscal year 2007 and fiscal year 2006, respectively.

 

Sales commissions in thePublishing Division increased $16,100 for the fiscal year ended 2007.  Sales commissions for this division fluctuatedepending upon the amount of sales made to our “house accounts,” which are ourlargest customers and do not have any commission expense associated with them,and sales made by the Company’s outside sales representatives.  Publishing Division sales commissions arepaid on net sales and were 1.4% of net sales in fiscal year 2007 and 1.1% ofnet sales in fiscal year 2006.

 

Sales commissions in theUBAH Division decreased $144,500.  UBAHDivision sales commissions are paid on retail sales and were 31.3% for fiscalyear 2007 and 37.6% for fiscal year 2006. The fluctuation in the percentages of commission expense to retail salesis the result of the type of sale.  Homeshows, book fairs, school and library sales and direct sales have differentcommission rates.  Also 

 

17

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contributing to the fluctuations in thepercentages is the payment of overrides and bonuses, both dependent onconsultants’ monthly sales and downline sales. The decrease in sales commissions is the result of lower sales in theUBAH Division.

 

General and administrative expenses include the executive department, accountingdepartment, information services department, general office management andbuilding facilities management.  General and administrative expenses increasedslightly because of an increase in materials and supplies, outside services andpayroll costs, offset by a decrease in legal and audit fees.  General and administrative expenses as apercentage of gross sales were 4.1% for fiscal year 2007 and 4.0% for fiscalyear 2006.

 

Interest expense decreased$75,500 due to decreased short-term borrowings throughout the fiscal year.  Interest expense as a percentage of grosssales was negligible at 0.02% in fiscal year 2007 and 0.2% in fiscal year 2006.

 

The tax provision for fiscalyear 2006 was $1,471,000.  The effectiverate for fiscal year 2007 was 37.9% and for fiscal year 2006 was 37.1%.  Our effective tax rate is higher than theFederal statutory rate due to state income taxes.

 

**Contractual Obligations**

 

The table below summarizesthe maturity dates of our contractual obligations by period.

 
| ** **                                                                               | ** ** | **Payments due by period** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual obligations**                                                         | ** ** | **Total**                                 | ** ** | **Less  than  1  year** | ** ** | **1-3  years** | ** ** | **3-5  years** | ** ** | **More  then  5  years** | ** ** |
| ** **                                                                               | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-Term  Debt Obligations                                                              |       | —                                    |       | — |   | — |   | — |   | — |   |
|                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital  Lease Obligations                                                               |       | —                                    |       | — |   | — |   | — |   | — |   |
|                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Operating Lease  Obligations                                                             |       | —                                    |       | — |   | — |   | — |   | — |   |
| Purchase  Obligations                                                                    |       | $                                         | 3,046,700  |   | $ | 3,046,700 |   | — |   | — |   | — |   |
|                                                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Other  Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under GAAP |       | —                                    |       | — |   | — |   | — |   | — |   |
| **Total**                                                                                |       | $                                         | 3,046,700  |   | $ | 3,046,700 |   | $ | — |   | $ | — |   | $ | — |   |
|                                                                                          |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

## Bank Credit Agreement

 

Effective June 30, 2007 we signed a Ninth Amendment to the Credit and Security Agreement with Arvest Bank which provided a $5,000,000 line of credit through June 30, 2008.  Interest is payable monthly at the Wall Street Journal prime-floating rate minus 0.75% (5.25% at February 29, 2008) and borrowings are collateralized by substantially all assets.  At February 29, 2008, we had no borrowings 

 

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outstanding.  Available credit under the revolving credit agreement was $5,000,000 at February 29, 2008. We also had no borrowings outstanding under the agreement during the fiscal year ended February 29, 2008.

 

Thisagreement also contains a provision for our use of the Bank’s letters ofcredit.  The Bank agrees to issue, orobtain issuance of commercial or standby letters of credit provided that noletters of credit will have an expiry date later than June 30, 2008 andthat the sum of the line of credit plus the letters of credit would not exceedthe borrowing base in effect at the time.

 

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**CriticalAccounting Policies**

 

*Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectable accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.*

 

*Actual results may materially differ from these estimates under different assumptions or conditions.  Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report.  However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.*

 

**Stock-Based Compensation**

 

We account for stock-basedcompensation whereby share-based payment transactions with employees, such asstock options and restricted stock, are measured at estimated fair value atdate of grant and recognized as compensation expense over the vesting period.

 

**RevenueRecognition**

 

Sales are recognized andrecorded when products are shipped. Products are shipped FOB shipping point. The UBAH Division’s sales arepaid before the product is shipped. These sales accounted for 73% of net revenues in FY2008, 74% of netrevenues in FY2007, and 74% of net revenues in FY2006.  The provisions of the SEC Staff AccountingBulletin No.104, “Revenue Recognition in Financial Statements,” have beenapplied, and as a result, a reserve is provided for estimated future salesreturns.  Our sales return policy allowsthe customer to return all purchases for an exchange or refund for up to 30days after the customer receives the item. Estimated allowances for sales returns are recorded as sales arerecognized and recorded.

 

Management uses a movingaverage calculation to estimate the allowance for sales returns.  We are not responsiblefor product damaged in transit.  Damagedreturns are primarily from the retail stores. The damages occur in the stores, not in shipping to the stores.  It is industry practice to accept returnsfrom wholesale customers. Transportation revenue, the amount billed to the customer for shippingthe product, is recorded when products are shipped.  Management has estimated and included areserve for sales returns of $84,000 as of February 29, 2008 and $84,000as of February 28, 2007.

 

**Allowance for Doubtful Accounts**

 

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments.  An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, customers’ financial conditions and current economic trends.  Management has estimated allowance for doubtful accounts of $74,400 as of February 29, 2008 and $75,000 as of February 28, 2007.

 

**Inventory**

 

Management continuallyestimates and calculates the amount of non-current inventory.  The inventory arises due to occasionalpurchases of book inventory in quantities in excess of what will be sold withinthe normal operating cycle due to minimum order requirements of our primarysupplier.  Noncurrent inventory wasestimated by management using the current year turnover ratio by title.  All inventory in excess of 2 1⁄2 years ofanticipated sales was classified as noncurrent inventory.  Noncurrent 

 

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inventory balances were$764,000 and $808,000 at February 29, 2008 and February 28, 2007,respectively.

 

Inventories are presentednet of a valuation allowance.  Managementhas estimated and included a valuation allowance for both current andnoncurrent inventory.  This allowance isbased on management’s identification of slow moving inventory on hand.  Management has estimated a valuationallowance for both current and noncurrent inventory of $331,200 and $382,300 asof February 29, 2008 and February 28, 2007, respectively.

 

Ourproduct line contains approximately 1,400 titles, each with different rates ofsale, depending upon the popularity of the title.  Almost all of our product line is saleable asthe books are not topical in nature and remain current in content today as wellas in the future.  A few of the titles,less than 50, have a limited time when they remain current in content, i.e.computer books, and these few titles are fully reserved.  Our products are printed in Europe, China,Singapore, India, Malaysia and Dubai resulting in a six-month lead-time to havea title reprinted and delivered to us.

 

Ourprincipal supplier, based in England, imposes minimum order requirements beforereprinting a title.  At the current timewe must reorder 7,500 or more of a title in order to get a solo print run.  If we order less than 7,500 of a title, thenwe must share a print run with the supplier’s other customers. Sharing a printrun has resulted in delays of up to twelve months in receiving the orderedtitle.  Anticipating customer preferencesand purchasing habits requires historical analysis of similar titles in thesame series. We then place the initial order or re-order based upon thisanalysis.

 

Thesefactors and historical analysis have led Management to determine that 2 1⁄2 yearsrepresents a reasonable estimate of the normal operating cycle for ourproducts.

 

**New Accounting Pronouncements**

 

TheFinancial Accounting Standards Board (“FASB”) periodically issues newaccounting standards in a continuing effort to improve standards of financialaccounting and reporting. We have reviewed the recently issued pronouncementsand concluded that the following new accounting standards are applicable to us.

 

21

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In September 2006,the FASB issued SFAS No. 157 “Fair Value Measurements” which amends andputs in one place guidance on the use of fair value measurements which had beenspread through four APB Opinions and 37 FASB Standards. No extensions of theuse of fair value measurements are contained in this new pronouncement and,with some special industry exceptions (e.g., broker-dealers), no significantchanges in practice should ensue. The standard is to be applied to financialstatements beginning after November 15, 2007. The adoption of SFAS No. 157is not expected to have a material impact on our financial position or resultsof operations.

 

In February 2007,the FASB issued SFAS No. 159 “Fair Value Option for Financial Assets andFinancial Liabilities — including an amendment of FASB Statement No. 115”.This standard permits the use of fair value measurement of financial assets andliabilities in the balance sheet with the net change in fair value recognizedin periodic net income. The Standard is effective for fiscal years beginningafter November 15, 2007. The adoption of this standard is not expected tohave a material effect on our financial position or results of operations.

 

In December 2007, the FASB issuedSFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements.”This statement amends Accounting Research Bulletin No. 51 “ConsolidatedFinancial Statements” to establish accounting and reporting standards fornoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  This statement is effective for fiscal years beginning after December 15,2008.  The adoption of this standard is not expected to have a materialeffect on our financial position or results of operations.

 

In December 2007, the FASB issued SFAS141(revised 2007) “Business Combinations.”  The statement requires theacquiring entity in a business combination to recognize all the assets acquiredand liabilities assumed in the transaction; establishes the acquisition-datefair value as the measurement objective for all assets acquired and liabilitiesassumed; and requires the acquirer to disclose to investors and other users allof the information they need to evaluate and understand the nature andfinancial effect of the business combination.  This statement is effectivefor acquisition dates on or after the beginning of the first annual reportingperiod beginning after December 15, 2008.  The adoption of thisstandard is not expected to have a material effect on our financial position orresults of operations.

 

Item 7A.                   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

We do not have any materialmarket risk.

 

Item 8.                             FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The information required bythis Item 8 begins at page 30.

 

Item 9.                             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

##### ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There have been nodisagreements on any matter of accounting principles or practices or financialstatement disclosure within the twenty-four months prior to February 29,2008.

 

22

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Item9.A                     CONTROLS ANDPROCEDURES

 

An evaluation was performed of the effectiveness of the design andoperation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) and15d-15(e) as of February 29, 2008. This evaluation was conductedunder the supervision and with the participation of our management, includingour Chief Executive Officer and our Controller/Corporate Secretary (PrincipalFinancial and Accounting Officer).

 

Based on that evaluation, these officers concluded that our disclosurecontrols and procedures were effective to ensure that information required tobe disclosed in reports that we file or submit under the Securities ExchangeAct of 1934 is accumulated and communicated to them, as appropriate, to allowtimely decisions regarding required disclosure and is recorded, processed,summarized and reported in accordance within the time periods specified inSecurities and Exchange Commission rules and forms.  It should be noted that the design of anysystem of controls is based in part upon certain assumptions about thelikelihood of future events.

 

During the 4th quarter of FY 2008 and subsequently, we made changes toour controls over accounts receivables. Processes involving detailed entries have been changed to improvecontrols over data entry.  In addition,detection controls have been established to help identify older accountsreceivable entries that may require correction.

 

Except as described above, during the fourth fiscal quarter of thefiscal year covered by this report on Form 10-K, there have been nochanges in our internal control over financial reporting that have materiallyaffected or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined inRule 13a-15(f) of the Securities Exchange Act of 1934 (the “ExchangeAct”).  Under the supervision and withthe participation of our management, including our President and ourController, we evaluated the effectiveness of our internal control overfinancial reporting based on the framework in INTERNAL CONTROL-INTEGRATEDFRAMEWORK issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  All internal controlsystems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined tobe effective can provide only reasonable assurance with respect to financialstatement preparation and presentation. Projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.  Based on our evaluationunder that framework and applicable SEC rules, our management concluded thatour internal control over financial reporting was effective as of February 29,2008.

 

This annual report does not include an attestation report of ourregistered public accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by our registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit us toprovide only management’s report in this annual report.

 

Item9.B                                                     OTHERINFORMATION

 

None

 

### PART III

 

Item 10.                         DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

 

(a)  Identification of Directors

 

The information required bythis Item 10 is furnished by incorporation by reference to the informationunder the caption “Election of Directors” in our definitive Proxy Statement tobe filed in connection with the Annual Meeting of Shareholders to be held on July 29,2008.

 

(b)  Identification of ExecutiveOfficers

 

Information regarding ourexecutive officers required by Item 401 of Regulation S-K is presented in Item1 hereof under the subcaption “Executive Officers” as permitted by GeneralInstruction G (3) to Form 10-K and Instruction 3 to Item 401(b) ofRegulation S-K.

 

(c)  Compliance with Section 16 (a) ofthe Exchange Act

 

The information required bythis Item 10 is furnished by incorporation by reference to the informationunder the caption “Section 16 (a) Beneficial Ownership ReportingCompliance” in our definitive Proxy Statement to be filed in connection withthe Annual Meeting of Shareholders to be held on July 29, 2008.

 

Item 11.                         EXECUTIVE COMPENSATION

 

The information required bythis Item 11 is furnished by incorporation by reference to the informationunder the caption “Executive Compensation” in our definitive Proxy Statement tobe filed in connection with the Annual Meeting of Shareholders to be held on July 29,2008.

 

23

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Item12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND

##### MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS

 

The information required bythis Item 12 is furnished by incorporation by reference to the informationunder the captions “Security Ownership of Certain Beneficial Owners andManagement” and “Compensation Plans” in our definitive Proxy Statement to befiled in connection with the Annual Meeting of Shareholders to be held on July 29,2008.

 

Item 13.        CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

None

 

24

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Item14.        PRINCIPALACCOUNTANT’S FEES AND SERVICES

 

The information required bythis Item 14 is furnished by incorporation by reference to the informationunder the caption “Independent Registered Public Accountants” in our definitiveProxy Statement to be filed in connection with the Annual Meeting ofShareholders to be held on July 29, 2008.

 

PART IV

 

Item 15.        EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)  The followingdocuments are filed as part of this report:

 

1.     Financial Statements

 
| ** **                                                                                                           | ** ** | **Page**   |
|----------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                           | ** ** | ** ** |
| Report of Independent  Registered Public Accounting Firm                                                             |       | 29         |
|                                                                                                                 |       |       |
| Balance Sheets - February 29, 2008 and  February 28, 2007                                                  |       | 30         |
|                                                                                                                 |       |       |
| Statements of Earnings - Years ended  February 29, 2008, February 28, 2007                                 |       | 31         |
| and February 28, 2006                                                                                           |       |       |
|                                                                                                                 |       |       |
| Statements of  Shareholders’ Equity -Years ended February 29, 2008,                                        |       | 32         |
| February 28,  2007 and February 28, 2006                                                                   |       |       |
|                                                                                                                 |       |       |
| Statements of Cash  Flows - Years ended February 29, 2008, February 28, 2007                               |       | 33         |
| and February 28,  2006                                                                                          |       |       |
|                                                                                                                 |       |       |
| Notes to Financial  Statements                                                                                       |       | 34         |
|                                                                                                                 |       |       |
| Schedules  have been omitted as such information is either not required or is included  in the financial statements. |

 

2.  Exhibits

 

3.1       Restated Certificate of Incorporation dated April 26, 1968 andCertificate of Amendment thereto dated June 21, 1968 are incorporatedherein by reference to Exhibit 1 to Registration Statement on Form 10(File No. 0-4957).

 

3.2       Certificate of Amendment of Restated Certificate of Incorporation datedAugust 27, 1977 is incorporated herein by reference to Exhibit 20.1to Form 10-K for fiscal year ended February 28, 1981 (File No. 0-4957).

 

3.2       By-Laws as amended are incorporated herein  by reference to Exhibit 20.2 to Form 10-Kfor fiscal year ended February 28, 1981 (File No. 0-4957).

 

3.4       Certificate of Amendment of Restated Certificate of Incorporation datedNovember 17, 1986 is incorporated herein by reference to exhibit 3.3 to Form 10-Kfor fiscal year ended February 28, 1987 (File No. 0-4957).

 

3.5       Certificate of Amendment of Restated Certificate of Incorporation datedMarch 22, 1996 is incorporated herein by reference to Exhibit 3.4 to Form 10-Kfor fiscal year ended February 28, 1997 (File No. 0-4957).

 

25

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3.6       Certificate of Amendment of Restated Certificate of Incorporation datedJuly 15, 2002 is incorporated herein by reference to Exhibit 10.30 toForm 10-K dated February 28, 2003 (File No. 0-4957).

 

4.1       Specimens of Common Stock Certificates are incorporated herein byreference to Exhibits 3.1 and 3.2 to Registration Statement on Form 10-K(File No. 0-4957) filed June 29, 1970.

 

10.1     Usborne Agreement-Contractual agreement by and between the Company andUsborne Publishing Limited dated November 25, 1988 is incorporated hereinby reference to Exhibit 10.12 to Form 10-K dated February 28,1989 (File No. 0-4957).

 

10.2     Party Plan-Contractual agreement by and between the Company and UsbornePublishing Limited dated March 14, 1989 is incorporated herein byreference to Exhibit 10.13 to Form 10-K dated February 28, 1989(File No. 0-4957).

 

10.3     Amendment dated January 1, 1992 to Usborne Agreement - Contractualagreement by and between the Company and Usborne Publishing Limited isincorporated herein by reference to Exhibit 10.13 to Form 10-K dated February 29,1992 (File No. 0-4957).

 

10.4     Educational Development Corporation 1992 Incentive Stock Option Plan isincorporated herein by reference to Exhibit 4(c) to RegistrationStatement on Form S-8 (File No. 33-60188).

 

10.5     RestatedLoanAgreementdatedJune 30,1999betweentheCompanyandStateBank &Trust,N.A.,Tulsa,OK,isincorporatedhereinbyreferencetoExhibit 10.24toForm 10-KdatedFebruary 29,2000(FileNo. 0-4957).

 

10.6     Educational Development Corporation 2002 Incentive Stock Option Plan isincorporated herein by reference to Exhibit A to definitive proxystatement on Schedule 14A dated May 23, 2002 (File No. 0-4957).

 

10.7     Amendment dated November 12, 2002 to Usborne Agreement –Contractual agreement by and between we and Usborne Publishing Limited isincorporated herein by reference to Exhibit 10.24 to Form 10-K dated February 28,2003 (File No. 0-4957).

 

10.8     Employment Agreement between Randall W. White and the Company dated February 28,2004.

 

10.9     Fifth Amendment dated June 30, 2004 to Restated Loan Agreementbetween the Company and Arvest Bank, Tulsa, OK.

 

10.10   Sixth Amendment dated June 30, 2005 to Restated Loan Agreement betweenthe Company and Arvest Bank, Tulsa, OK.

 

10.11   Seventh Amendment dated September 2, 2005 to Restated LoanAgreement between the Company and Arvest Bank, Tulsa, OK.

 

10.12   Eighth Amendment dated June 30, 2006 to Restated Loan Agreement betweenthe Company and Arvest Bank, Tulsa, OK.

 

26

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10.13   NinthAmendment dated June 30, 2007 to Restated Loan Agreement between theCompany and Arvest Bank, Tulsa, OK.

 

*23.1   Consent of Independent Registered Public Accounting Firm

 

*31.1  Certificationof the Chief Executive Officer of Educational Development Corporation pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

*31.2  Certificationof the Controller and Corporate Secretary (Principal Financial and AccountingOfficer) of Educational Development Corporation pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002.

 

*32.1  Certificationpursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

----

*Filed Herewith

 

27

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SIGNATURES

 

Pursuant to the requirementsof Section 13 or 15(b) of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

EDUCATIONAL DEVELOPMENT CORPORATION

 
| Date:  | May 28, 2008 | By     | /s/ Marilyn Welborn                          |   |
|--------|-------------------|--------|----------------------------------------------|--------|
|   |              |   | Marilyn Welborn                              |
|   |              |   | Controller and Corporate Secretary           |
|   |              |   | (Principal Financial and Accounting Officer) |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the registrant and in the capacities and onthe date indicated.

 

 
| Date:  | May 28, 2008 | /s/  Randall W. White                         |   |
|--------|-------------------|-----------------------------------------------|--------|
|   |              | Randall  W. White                             |   |
|   |              | Chairman  of the Board                        |   |
|   |              | President,  Treasurer and                     |   |
|   |              | Director                                      |   |
|   |              |                                          |   |
|   |              |                                          |   |
|   | May 28, 2008 | /s/  John A. Clerico                          |   |
|   |              | John  A. Clerico, Director                    |   |
|   |              |                                          |   |
|   |              |                                          |   |
|   | May 28, 2008 | /s/  Dean Cosgrove                            |   |
|   |              | G.  Dean Cosgrove, Director                   |   |
|   |              |                                          |   |
|   |              |                                          |   |
|   | May 28, 2008 | /s/  James F. Lewis                           |   |
|   |              | James  F. Lewis, Director                     |   |
|   |              |                                          |   |
|   |              |                                          |   |
|   | May 28, 2008 | /s/  Marilyn Welborn                          |   |
|   |              | Marilyn  Welborn                              |   |
|   |              | Controller  and Corporate Secretary           |
|   |              | (Principal  Financial and Accounting Officer) |

 

28

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**Report of Independent Registered Public Accounting Firm**

 

To the Board of Directors and Shareholders

Educational Development Corporation

 

We have audited the balance sheetsof Educational Development Corporation as of February 29, 2008 andFebruary 28, 2007, and the related statements of earnings, shareholders’equity, and cash flows for each of the three years in the period ended February 29,2008.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Educational Development Corporation as of February 29,2008 February 28, and 2007, and the results of its operations and its cashflows for each of the three years in the period ended February 29, 2008,in conformity with accounting principles generally accepted in the UnitedStates of America.

 

We were not engaged to examinemanagement’s assertion about the effectiveness of Educational DevelopmentCorporation’s internal control over financial reporting as of February 29,2008 included in the accompanying Management’s Report on Internal Control OverFinancial Reporting and, accordingly, we do not express an opinion thereon.

 

/s/ Tullius Taylor Sartain & Sartain LLP

 

Tulsa, Oklahoma

May 28, 2008

 

 

29

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**EDUCATIONALDEVELOPMENT CORPORATION**

**BALANCESHEETS**

**AS OF FEBRUARY 29(28)**

 
| ** **                                                                                                       | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                       |       |        |       |        |       |
| ** **                                                                                                       |       |        |       |        |       |
| CURRENT ASSETS:                                                                                                  |       |        |       |        |       |
| Cash and cash equivalents                                                                                        |       | $           | 2,440,300  |        | $          | 1,254,300 |   |
| Accounts receivable, less allowance for  doubtful accounts and sales returns $158,400 (2008) and $158,900 (2007) |       | 2,611,800   |       | 2,849,300   |       |
| Inventories—Net                                                                                             |       | 11,818,700  |       | 12,388,000  |       |
| Prepaid expenses and other assets                                                                                |       | 112,000     |       | 95,400      |       |
| Income taxes receivable                                                                                          |       | —      |       | 3,400       |       |
| Deferred income taxes                                                                                            |       | 197,100     |       | 207,700     |       |
| Total current assets                                                                                             |       | 17,179,900  |       | 16,798,100  |       |
|                                                                                                             |       |        |       |        |       |
| INVENTORIES—Net                                                                                             |       | 459,000     |       | 459,100     |       |
|                                                                                                             |       |        |       |        |       |
| PROPERTY, PLANT AND EQUIPMENT—Net                                                                           |       | 2,382,800   |       | 2,385,300   |       |
|                                                                                                             |       |        |       |        |       |
| DEFERRED INCOME TAXES                                                                                            |       | 43,300      |       | 59,400      |       |
|                                                                                                             |       |        |       |        |       |
| TOTAL                                                                                                            |       | $           | 20,065,000 |        | $          | 19,701,900 |   |
|                                                                                                             |       |        |       |        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                    |       |        |       |        |       |
|                                                                                                             |       |        |       |        |       |
| CURRENT LIABILITIES:                                                                                             |       |        |       |        |       |
| Accounts payable                                                                                                 |       | $           | 2,456,900  |        | $          | 3,308,300 |   |
| Accrued salaries and commissions                                                                                 |       | 559,000     |       | 560,900     |       |
| Income taxes payable                                                                                             |       | 56,200      |       | —      |       |
| Other current liabilities                                                                                        |       | 195,800     |       | 171,400     |       |
| Total current liabilities                                                                                        |       | 3,267,900   |       | 4,040,600   |       |
|                                                                                                             |       |        |       |        |       |
| COMMITMENTS (Note 7)                                                                                             |       |        |       |        |       |
|                                                                                                             |       |        |       |        |       |
| SHAREHOLDERS’ EQUITY:                                                                                       |       |        |       |        |       |
| Common stock, $0.20 par value; Authorized  8,000,000 shares;                                                     |       |        |       |        |       |
| Issued 5,806,840 (2008) and 5,791,840  (2007) shares;                                                            |       |        |       |        |       |
| Outstanding 3,706,745 (2008) and 3,757,323  (2007) shares                                                        |       | 1,161,400   |       | 1,158,400   |       |
| Capital in excess of par value                                                                                   |       | 7,706,100   |       | 7,649,100   |       |
| Retained earnings                                                                                                |       | 19,206,100  |       | 17,707,700  |       |
|                                                                                                             |       | 28,073,600  |       | 26,515,200  |       |
| Less treasury stock, at cost                                                                                     |       | (11,276,500 | )          | (10,853,900 | )          |
|                                                                                                             |       | 16,797,100  |       | 15,661,300  |       |
|                                                                                                             |       |        |       |        |       |
| TOTAL                                                                                                            |       | $           | 20,065,000 |        | $          | 19,701,900 |   |

 

See notes to financialstatements.

 

30

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**STATEMENTS OF EARNINGS**

**FOR THE YEARS ENDED FEBRUARY 29(28),**

 
| ** **                                                            | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|-----------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                  |       |        |       |        |       |        |       |
| GROSS SALES                                                           |       | $           | 40,600,300 |        | $          | 41,920,682  |       | $ | 42,567,648 |   |
| Less discounts and allowances                                         |       | (11,806,700 | )          | (12,358,838 | )          | (12,367,775 | )          |
| Transportation revenue                                                |       | 1,727,100   |       | 1,841,621   |       | 1,589,017   |       |
| NET REVENUES                                                          |       | 30,520,700  |       | 31,403,465  |       | 31,788,890  |       |
| COST OF SALES                                                         |       | 10,750,200  |       | 11,274,571  |       | 11,651,182  |       |
| Gross margin                                                          |       | 19,770,500  |       | 20,128,894  |       | 20,137,708  |       |
|                                                                  |       |        |       |        |       |        |       |
| OPERATING EXPENSES:                                                   |       |        |       |        |       |        |       |
| Operating and selling                                                 |       | 7,424,500   |       | 7,509,439   |       | 7,094,963   |       |
| Sales commissions                                                     |       | 7,137,600   |       | 7,397,767   |       | 7,526,184   |       |
| General and administrative                                            |       | 1,653,100   |       | 1,722,933   |       | 1,712,469   |       |
| Interest                                                              |       |        |       | 7,581       |       | 83,054      |       |
|                                                                  |       | 16,215,200  |       | 16,637,720  |       | 16,416,670  |       |
|                                                                  |       |        |       |        |       |        |       |
| OTHER INCOME                                                          |       | 176,800     |       | 386,926     |       | 93,362      |       |
|                                                                  |       |        |       |        |       |        |       |
| EARNINGS BEFORE INCOME TAXES                                          |       | 3,732,100   |       | 3,878,100   |       | 3,814,400   |       |
|                                                                  |       |        |       |        |       |        |       |
| INCOME TAXES                                                          |       | 1,407,700   |       | 1,471,000   |       | 1,416,000   |       |
|                                                                  |       |        |       |        |       |        |       |
| NET EARNINGS                                                          |       | $           | 2,324,400  |        | $          | 2,407,100   |       | $ | 2,398,400 |   |
|                                                                  |       |        |       |        |       |        |       |
| BASIC AND DILUTED EARNINGS                                            |       |        |       |        |       |        |       |
| PER SHARE:                                                            |       |        |       |        |       |        |       |
| Basic                                                                 |       | $           | 0.62       |        | $          | 0.64        |       | $ | 0.64 |   |
| Diluted                                                               |       | $           | 0.60       |        | $          | 0.62        |       | $ | 0.62 |   |
|                                                                  |       |        |       |        |       |        |       |
| WEIGHTED AVERAGE NUMBER OF COMMON AND  EQUIVALENT SHARES OUTSTANDING: |       |        |       |        |       |        |       |
| Basic                                                                 |       | 3,748,121   |       | 3,755,608   |       | 3,747,759   |       |
| Diluted                                                               |       | 3,859,937   |       | 3,875,000   |       | 3,898,737   |       |

 

See notes to financial statements.

 

31

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**EDUCATIONAL DEVELOPMENT CORPORATION**

**STATEMENTS OF SHAREHOLDERS’ EQUITY**

**FOR THE YEARS ENDED FEBRUARY 29(28),**

 
| ** **                                      | ** ** | **Common Stock**                                     | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** **  | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------|------------|------------|------------|---------------------|------------|--------------|------------|-------------------------|------------|-------------|------------|
| ** **                                      | ** ** | **(par value $ 0.20 per share)** | ** ** | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **              | ** ** | ** **  | ** ** |
| ** **                                      | ** ** | **Number of**                                        | ** ** | ** ** | ** ** | **Capital in** | ** ** | ** **   | ** ** | **Treasury Stock** | ** ** | ** **  | ** ** |
| ** **                                      | ** ** | **Shares**                                                | ** ** | ** ** | ** ** | **Excess of**  | ** ** | **Retained** | ** ** | **Number of**      | ** ** | ** **  | ** ** | **Shareholders’** | ** ** |
| ** **                                      | ** ** | **Issued**                                                | ** ** | **Amount** | ** ** | **Par Value**  | ** ** | **Earnings** | ** ** | **Shares**              | ** ** | **Amount**  | ** ** | **Equity** | ** ** |
|                                            |       |                                                      |       |       |       |                |       |         |       |                    |       |        |       |   |   |
| BALANCE—February 28,  2005            |       | 5,762,340                                                 |       | 1,152,500  |       | 7,469,500           |       | 14,214,100   |       | 2,026,827               |       | (10,703,900 | )          | 12,132,200 |   |
|                                            |       |                                                      |       |       |       |                |       |         |       |                    |       |        |       |   |   |
| Purchases of  treasury stock                    |       |                                                      |       |       |       |                |       |         |       | 7,500                   |       | (77,300     | )          | (77,300 | ) |
| Sales of treasury  stock                        |       |                                                      |       |       |       | 48,300              |       |         |       | (16,410                 | )          | 86,900      |       | 135,200 |   |
| Exercise of  options ($2.1875—$6.00/share) |       | 9,500                                                     |       | 1,900      |       | 47,500              |       |         |       |                    |       |        |       | 49,400 |   |
| Tax benefit—stock  options                 |       |                                                      |       |       |       | 12,200              |       |         |       |                    |       |        |       | 12,200 |   |
| Dividends paid  ($0.15/share)                   |       |                                                      |       |       |       |                |       | (560,700     | )          |                    |       |        |       | (560,700 | ) |
| Dividends  declared ($0.20/share)               |       |                                                      |       |       |       |                |       | (750,800     | )          |                    |       |        |       | (750,800 | ) |
| Net earnings                                    |       |                                                      |       |       |       |                |       | 2,398,400    |       |                    |       |        |       | 2,398,400 |   |
|                                            |       |                                                      |       |       |       |                |       |         |       |                    |       |        |       |   |   |
| BALANCE—February 28,  2006            |       | 5,771,840                                                 |       | 1,154,400  |       | 7,577,500           |       | 15,301,000   |       | 2,017,917               |       | (10,694,300 | )          | 13,338,600 |   |
|                                            |       |                                                      |       |       |       |                |       |         |       |                    |       |        |       |   |   |
| Purchases of  treasury stock                    |       |                                                      |       |       |       |                |       |         |       | 35,616                  |       | (260,700    | )          | (260,700 | ) |
| Sales of treasury  stock                        |       |                                                      |       |       |       | 10,500              |       |         |       | (19,016                 | )          | 101,100     |       | 111,600 |   |
| Exercise of  options ($2.1875—$4.00/share) |       | 20,000                                                    |       | 4,000      |       | 51,900              |       |         |       |                    |       |        |       | 55,900 |   |
| Tax benefit—stock  options                 |       |                                                      |       |       |       | 9,200               |       |         |       |                    |       |        |       | 9,200 |   |
| Cash dividends -  net of accrual                |       |                                                      |       |       |       |                |       | (400         | )          |                    |       |        |       | (400 | ) |
| Net earnings                                    |       |                                                      |       |       |       |                |       | 2,407,100    |       |                    |       |        |       | 2,407,100 |   |
| BALANCE—February 28,  2007            |       | 5,791,840                                                 |       |       | 1,158,400  |                |       | 7,649,100    |       |                    | 17,707,700 |        | 2,034,517  |   |   | (10,853,900 | ) |   | 15,661,300 |   |
|                                            |       |                                                      |       |       |       |                |       |         |       |                    |       |        |       |   |   |
| Purchases of  treasury stock                    |       |                                                      |       |       |       |                |       |         |       | 81,059                  |       | (504,900    | )          | (504,900 | ) |
| Sales of treasury  stock                        |       |                                                      |       |       |       |                |       |         |       | (15,481                 | )          | 82,300      |       | 82,300 |   |
| Exercise of  options($4.00/sh)                  |       | 15,000                                                    |       | 3,000      |       | 57,000              |       |         |       |                    |       |        |       | 60,000 |   |
| Dividends paid  ($0.22/share)                   |       |                                                      |       |       |       |                |       | (826,000     | )          |                    |       |        |       | (826,000 | ) |
| Net earnings                                    |       |                                                      |       |       |       |                |       | 2,324,400    |       |                    |       |        |       | 2,324,400 |   |
| BALANCE—February 28,  2008            |       | 5,806,840                                                 |       | $          | 1,161,400  |                | $          | 7,706,100    |       | $                       | 19,206,100 |        | 2,100,095  |   | $ | (11,276,500 | ) | $ | 16,797,100 |   |
|                                                 |            |                                                           |            |            |            |                     |            |              |            |                         |            |             |            |  |  |  |  |  |  |  |  |  |  |  |

 

See notes to financial statements.

 

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**EDUCATIONAL DEVELOPMENT CORPORATION**

** **

**STATEMENTSOF CASH FLOWS**

**FOR THE YEARS ENDED FEBRUARY 29(28)**

 
| ** **                                                                            | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**    | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |       |       |       |       |        |       |
| Net earnings                                                                          |       | $          | 2,324,400  |       | $          | 2,407,100   |       | $ | 2,398,400 |   |
| Adjustments to reconcile net earnings to  net cash provided  by operating activities: |       |       |       |       |       |        |       |
| Depreciation                                                                          |       | 139,400    |       | 143,500    |       | 138,000     |       |
| Deferred income taxes                                                                 |       | 26,700     |       | (43,500    | )          | (82,000     | )          |
| Provision for doubtful accounts and sales  returns                                    |       | 1,527,200  |       | 1,482,800  |       | 1,323,500   |       |
| Changes in assets and liabilities:                                                    |       |       |       |       |       |        |       |
| Accounts and income tax receivable                                                    |       | (1,286,300 | )          | (1,635,100 | )          | (1,527,700  | )          |
| Inventories                                                                           |       | 569,400    |       | (308,100   | )          | (66,400     | )          |
| Prepaid expenses and other assets                                                     |       | (16,600    | )          | 24,100     |       | (16,200     | )          |
| Accounts payable, accrued salaries and  commissions, and other current liabilities    |       | (828,900   | )          | 479,800    |       | (859,600    | )          |
| Income tax payable                                                                    |       | 56,200     |       | (71,700    | )          | 71,800      |       |
| Total adjustments                                                                     |       | 187,100    |       | 71,800     |       | (1,018,600  | )          |
|                                                                                  |       |       |       |       |       |        |       |
| Net cash provided by operating activities                                             |       | 2,511,500  |       | 2,478,900  |       | 1,379,800   |       |
|                                                                                  |       |       |       |       |       |        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |       |       |       |       |        |       |
| Purchases of property and equipment                                                   |       | (136,900   | )          | (34,900    | )          | (229,200    | )          |
|                                                                                  |       |       |       |       |       |        |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |       |       |       |       |        |       |
| Borrowings on revolving credit agreement                                              |       | —     |       | 3,295,000  |       | 14,239,000  |       |
| Payments on revolving credit agreement                                                |       | —     |       | (3,971,000 | )          | (14,990,900 | )          |
| Cash received from exercise of stock  options                                         |       | 60,000     |       | 55,900     |       | 49,400      |       |
| Tax benefit of stock options exercised                                                |       | —     |       | 9,200      |       | 12,200      |       |
| Cash received from sale of treasury stock                                             |       | 82,300     |       | 111,600    |       | 135,200     |       |
| Cash paid to acquire treasury stock                                                   |       | (504,900   | )          | (260,700   | )          | (77,300     | )          |
| Dividends paid                                                                        |       | (826,000   | )          | (751,200   | )          | (560,700    | )          |
|                                                                                  |       |       |       |       |       |        |       |
| Net cash used in financing activities                                                 |       | (1,188,600 | )          | (1,511,200 | )          | (1,193,100  | )          |
|                                                                                  |       |       |       |       |       |        |       |
| NET INCREASE (DECREASE) IN CASH AND                                                   |       |       |       |       |       |        |       |
| CASH EQUIVALENTS                                                                      |       | 1,186,000  |       | 932,800    |       | (42,500     | )          |
|                                                                                  |       |       |       |       |       |        |       |
| CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR                                      |       | 1,254,300  |       | 321,500    |       | 364,000     |       |
|                                                                                  |       |       |       |       |       |        |       |
| CASH AND CASH EQUIVALENTS—END OF YEAR                                            |       | $          | 2,440,300  |       | $          | 1,254,300   |       | $ | 321,500 |   |
|                                                                                  |       |       |       |       |       |        |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                     |       |       |       |       |       |        |       |
| Cash paid for interest                                                                |       | $          | —     |       | $          | 11,400      |       | $ | 85,900 |   |
| Cash paid for income taxes                                                            |       | $          | 1,321,500  |       | $          | 1,542,400   |       | $ | 1,381,100 |   |
|                                                                                  |       |       |       |       |       |        |       |
| SUPPLEMENTAL DISCLOSURE NON CASH INVESTING AND FINANCING ACTIVITIES:                  |       |       |       |       |       |        |       |
| Dividend declared not paid                                                            |       | $          | —     |       | —     |        | $          | 750,800 |   |
|                                                                                       |            |            |            |            |            |             |            |  |  |  |  |

 

See notes to financial statements.

 

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**EDUCATIONAL DEVELOPMENT CORPORATION**

 

**NOTES TO FINANCIAL STATEMENTS**

**YEARS ENDED FEBRUARY 29, 2008, FEBRUARY28, 2007 AND FEBRUARY 28, 2006**

** **

**1.**                      SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

** **

***Nature of Business*****—**We distributebooks and publications through our Publishing and Usborne Books at Home (“UBAH”)Divisions to book, toy and gift stores, libraries and home educators locatedthroughout the United States (“U.S.”). We are the sole U.S. distributor of books and related items, which arepublished by an England based publishing company.  The England based publishing company is ourprimary supplier.

 

***Estimates*****—**Our financialstatements were prepared in conformity with accounting principles generallyaccepted in the United States of America, which requires management to makeestimates and assumptions that affect the amounts and disclosures in thefinancial statements.  Actual resultscould differ from these estimates.

 

***Business Concentration*****—**A significantportion of our inventory purchases are concentrated with an England-basedpublishing company.  Purchases from thiscompany were approximately $9.7 million, $10.6 million, and $11.9 million forthe fiscal years ended February 29, 2008, February 28, 2007 and February 28,2006, respectively.  Total inventorypurchases for those same periods were approximately $12.3 million, $12.4million, and $13.1 million, respectively.

 

***Cash and Cash Equivalents*****—**Cash and cashequivalents include cash on hand and cash on deposit in banks.  We maintain bank accounts that are insured by theFederal Deposit Insurance Corporation (FDIC) up to $100,000.  At times, cash balances may be in excess ofthe FDIC insurance limit. We believe no significant concentrations of riskexist with respect to our cash.  Themajority of payments due from banks for third party credit card transactionsprocess within two business days. Amounts due are classified as cash and cash equivalents at February 29,2008 and February 28, 2007.

 

***AccountsReceivable*****—** Accountsreceivable are uncollateralized customer obligations due under normal tradeterms generally requiring payment within thirty days from the invoice date.  Trade accounts are stated at the amountmanagement expects to collect from outstanding balances.  Delinquency fees are not assessed.  Payments of accounts receivable are allocatedto the specific invoices identified on the customers’ remittance advice.  Accounts receivable are carried at originalinvoice amount less an estimated reserve made for returns and discounts basedon quarterly review of historical rates of returns and expected discounts to betaken.  The carrying amount of accountsreceivable is reduced, if needed, by a valuation allowance that reflectsmanagement’s best estimate of the amounts that will not be collected.

 

Management periodically reviews accounts receivablebalances and, based on an assessment of current creditworthiness, estimates theportion, if any, of the balance that will not be collected.  Management provides for probableuncollectible amounts through a charge to earnings and a credit to a valuationaccount based on its assessment of the current status of the individual accounts.  Balances which remain outstanding aftermanagement has used reasonable collection efforts are written off through acharge to the valuation allowance and a credit to trade accounts receivable.Changes in the valuation allowance have not been material to the financialstatements. Recoveries of trade receivables previously written off are recordedwhen received.

 

***Inventories*****—**Inventories arestated at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method.  We present a portion of our inventory as anoncurrent asset.  Occasionally wepurchase book inventory in quantities in excess of what will be sold within thenormal 

 

34

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operating cycle due to minimum order requirements of our primarysupplier.  These excess quantities areincluded in noncurrent inventory.  Weestimate noncurrent inventory using the current year turnover ratio by title.  All inventory in excess of 21⁄2 years ofanticipated sales is classified as noncurrent inventory.

 

Inventories are presentednet of a valuation allowance.  Managementhas estimated and included an allowance for slow moving inventory for bothcurrent and noncurrent inventory.  Thisallowance is based on management’s analysis of inventory on hand at February 29,2008 and February 28, 2007.

 

***Property, Plant and Equipment*****—**Property, plantand equipment are stated at cost and depreciated on a straight-line basis overthe estimated useful lives, as follows:

 

| Building                       |   | 30 years     |
|--------------------------------|--------|--------------|
| Machinery & equipment |   | 3 - 10 years |
| Furniture & fixtures  |   | 3 years      |

 

***Income Taxes*****—**Deferred tax assets and liabilities are recorded for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, using the regular tax rate expected to be in effect when the taxes areactually paid or recovered.  Net deferredtax assets related to the recognition of future tax benefits are recorded tothe extent that realization of such benefits is considered more likely than notto occur.

 

The Financial AccountingStandards Board issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes - an interpretation of FASB Statement No. 109, Accounting forIncome Taxes” (“FIN No. 48”) which was effective for us on March 1,2007.  FIN No. 48 addresses thedetermination of whether tax benefits claimed or expected to be claimed on atax return should be recorded in the financial statements.  Under FIN No. 48, we may recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authoritiesbased on the technical merits of the position. The tax benefits recognized in the financial statements from suchposition should be measured based on the largest benefit that has a greaterthan fifty percent likelihood of being realized upon ultimate settlement.  FIN No. 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods and disclosure requirements.

 

We classify interest andpenalties associated with income taxes as a component of income tax expense(benefit) on the statement of earnings.

 

***Revenue Recognition*****—**Sales arerecognized and recorded when products are shipped.  Products are shipped FOB shipping point.  The UBAH Division’s sales are paid before theproduct is shipped.  These salesaccounted for 73% of net revenues in FY 2008 and 74% of net revenues in both FY2007 and 2006. The provisions of the SEC Staff Accounting Bulletin No.104, “RevenueRecognition in Financial Statements,” have been applied, and as a result, areserve is provided for estimated future sales returns.

 

Our sales return policyallows the customer to return all purchases for an exchange or refund for up to30 days after the customer receives the item. Estimated allowances for sales returns are recorded as sales arerecognized and recorded. Management uses a moving average calculation toestimate the allowance for sales returns.  We are not responsible for product damaged intransit. Damaged returns are primarily from the retail stores related todamages which occur in the stores, not in shipping to the stores.  It is industry practice to accept returnsfrom wholesale customers.  Management hasestimated and included a reserve for sales returns of $84,000 as of February 29,2008 and of February 28, 2007.

 

Transportation revenue, theamount billed to the customer for shipping the product, is recorded whenproducts are shipped.

 

***Advertising Costs*****—**Advertising costs are expensed as incurred.  Advertisingexpenses, included in selling and operating expenses in the statements ofearnings, were $127,900 in FY 2008, $148,000 in FY 2007, and $41,400 in FY2006.

 

***Shipping and Handling Costs*****—** We classify shipping and handling costs as operatingand selling expenses in the statements of earnings.  Shippingand handling costs were $2,548,700 for FY 2008, $2,420,700 for FY 2007, and$2,278,200 for FY 2006.

 

***Earnings per Share*****—**Basic earningsper share (“EPS”) is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period.  Diluted EPS is based on the combined weightedaverage number of common shares outstanding and dilutive potential commonshares issuable which include, where appropriate, the assumed exercise ofoptions.  In computing Diluted EPS wehave utilized the treasury stock method.

 

35

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The following reconciles thediluted earnings per share:

 
| ** **                                       | ** ** | **Year Ended February 29(28),** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Diluted Earnings Per Share:**                  |       |                                           |       |   |   |   |   |
| Net earnings applicable to common  shareholders  |       | $                                              | 2,324,400  |   | $ | 2,407,100 |   | $ | 2,398,400 |   |
|                                             |       |                                           |       |   |   |   |   |
| **Shares:**                                      |       |                                           |       |   |   |   |   |
| Weighted average shares outstanding–basic   |       | 3,748,121                                      |       | 3,755,608 |   | 3,747,759 |   |
| Assumed exercise of options                      |       | 111,816                                        |       | 119,392 |   | 150,978 |   |
|                                             |       |                                           |       |   |   |   |   |
| Weighted average shares outstanding–diluted |       | 3,859,937                                      |       | 3,875,600 |   | 3,898,737 |   |
|                                             |       |                                           |       |   |   |   |   |
| **Diluted Earnings Per Share**                   |       | $                                              | 0.60       |   | $ | 0.62 |   | $ | 0.62 |   |

 

There were no stock optionsfor the fiscal years ended February 29, 2008, February 28, 2007 and February 28,2006 excluded from the diluted earnings per share calculation.

 

***Fair Value of Financial Instruments*****—**For cash and cash equivalents, accounts receivable, accounts payable,the carrying amount approximates fair value because of the short maturity ofthose instruments.

 

***Long-Lived Asset Impairment*****—** We review the value of long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable based on estimated future cash flows.  No impairment was noted as a result of suchreview during the years ended February 29, 2008, February 28, 2007and February 28, 2006.

 

***Stock-Based Compensation*****—S**hare-basedpayment transactions with employees, such as stock options and restrictedstock, are measured at estimated fair value at date of grant and recognized ascompensation expense over the vesting period.

 

***Reclassifications*****—**Certain prioryear amounts have been reclassified to conform with the FY 2008 presentation.

 

***New accounting pronouncements*****—**The Financial Accounting Standards Board (“FASB”) periodically issues newaccounting standards in a continuing effort to improve standards of financialaccounting and reporting. We have reviewed the recently issued pronouncementsand concluded that the following new accounting standards are applicable to us.

 

36

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In September 2006, theFASB issued SFAS No. 157 “Fair Value Measurements” which amends and putsin one place guidance on the use of fair value measurements which had beenspread through four APB Opinions and 37 FASB Standards. No extensions of theuse of fair value measurements are contained in this new pronouncement, andwith some special industry exceptions (e.g., broker-dealers), no significantchanges in practice should ensue. The standard is to be applied to financialstatements beginning after November 15, 2007. The adoption of SFAS No. 157is not expected to have a material impact on our financial position or resultsof operations.

 

In February 2007, theFASB issued SFAS No. 159 “Fair Value Option for Financial Assets andFinancial Liabilities — including an amendment of FASB Statement No. 115”.This standard permits the use of fair value measurement of financial assets andliabilities in the balance sheet with the net change in fair value recognizedin periodic net income. The Standard is effective for fiscal years beginningafter November 15, 2007. The adoption of this standard is not expected tohave a material effect on our financial position or results of operations.

 

In December 2007, theFASB issued SFAS No. 160 “Noncontrolling Interests in ConsolidatedFinancial Statements.” This statement amends Accounting Research Bulletin No. 51“Consolidated Financial Statements” to establish accounting and reportingstandards for noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  This statement is effective for fiscalyears beginning after December 15, 2008.  The adoption of thisstandard is not expected to have a material effect on our financial position orresults of operations.

 

In December 2007, theFASB issued SFAS 141(revised 2007) “Business Combinations.”  The statementrequires the acquiring entity in a business combination to recognize all theassets acquired and liabilities assumed in the transaction; establishes theacquisition-date fair value as the measurement objective for all assetsacquired and liabilities assumed; and requires the acquirer to disclose toinvestors and other users all of the information they need to evaluate andunderstand the nature and financial effect of the business combination. This statement is effective for acquisition dates on or after the beginning ofthe first annual reporting period beginning after December 15, 2008. The adoption of this standard is not expected to have a material effect on ourfinancial position or results of operations.

 

37

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**2.****                   ****INVENTORIES**

 

Inventories consist of thefollowing:

 

| ** **                      | ** ** | **February 29(28),** | ** ** |
|---------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **2008**                  | ** ** | **2007** | ** ** |
| Current:                        |       |                      |       |   |   |
| Book inventory                  |       | $                         | 11,844,900 |   | $ | 12,421,400 |   |
| Inventory valuation allowance   |       | (26,200                   | )          | (33,400 | ) |
|                            |       |                      |       |   |   |
| Inventories net–current    |       | $                         | 11,818,700 |   | $ | 12,388,000 |   |
|                            |       |                      |       |   |   |
| Noncurrent:                     |       |                      |       |   |   |
| Book inventory                  |       | $                         | 764,000    |   | $ | 808,000 |   |
| Inventory valuation allowance   |       | (305,000                  | )          | (348,900 | ) |
|                            |       |                      |       |   |   |
| Inventories net–noncurrent |       | $                         | 459,000    |   | $ | 459,100 |   |

 

**3.**                    PROPERTY, PLANTAND EQUIPMENT

** **

Property, plant andequipment consist of the following:

 
| ** **                    | ** ** | **February 29(28),** | ** ** |
|-------------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **2008**                  | ** ** | **2007** | ** ** |
| Land                          |       | $                         | 250,000    |   | $ | 250,000 |   |
| Building                      |       | 2,124,700                 |       | 2,124,700 |   |
| Machinery and equipment       |       | 2,129,100                 |       | 1,992,200 |   |
| Furniture and fixtures        |       | 66,900                    |       | 66,900 |   |
|                          |       | 4,570,700                 |       | 4,433,800 |   |
| Less accumulated depreciation |       | (2,187,900                | )          | (2,048,500 | ) |
|                          |       | $                         | 2,382,800  |   | $ | 2,385,300 |   |

 

38

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**4.**                    INCOME TAXES

** **

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. The tax effects of significant items comprising our net deferred taxassets and liabilities as of February 29, 2008 and February 28, 2007are as follows:

 
| ** **                          | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|
| Current:                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred tax assets:                |       |       |       |       |       |
| Allowance for doubtful accounts     |       | $          | 28,300     |       | $          | 28,500 |   |
| Inventory overhead capitalization   |       | 90,400     |       | 90,200     |       |
| Allowance for slow moving inventory |       | 10,000     |       | 12,700     |       |
| Allowance for sales returns         |       | 31,900     |       | 31,900     |       |
| Accruals                            |       | 36,500     |       | 44,400     |       |
|                                |       |       |       |       |       |
| Deferred tax assets                 |       | 197,100    |       | 207,700    |       |
|                                |       |       |       |       |       |
| Deferred tax asset–Net         |       | $          | 197,100    |       | $          | 207,700 |   |
|                                |       |       |       |       |       |
| Noncurrent:                         |       |       |       |       |       |
| Deferred tax assets:                |       |       |       |       |       |
| Allowance for slow moving inventory |       | $          | 115,900    |       | $          | 132,600 |   |
|                                |       |       |       |       |       |
| Deferred tax assets                 |       | 115,900    |       | 132,600    |       |
|                                |       |       |       |       |       |
| Deferred tax liabilities:           |       |       |       |       |       |
| Property and equipment              |       | (72,600    | )          | (73,200    | )          |
|                                |       |       |       |       |       |
| Deferred tax liabilities            |       | (72,600    | )          | (73,200    | )          |
|                                |       |       |       |       |       |
| Deferred tax asset–Net         |       | $          | 43,300     |       | $          | 59,400 |   |

 

Management has determinedthat no valuation allowance is necessary to reduce the deferred tax assets asit is more likely than not that such assets are realizable.

 

The components of income taxexpense are as follows:

 
| ** **               | ** ** | **As of February 29(28),** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:                 |       |                                      |       |   |   |   |   |
| Federal                  |       | $                                         | 1,160,000  |   | $ | 1,287,300 |   | $ | 1,273,200 |   |
| State                    |       | 220,000                                   |       | 227,200 |   | 224,800 |   |
|                     |       | 1,380,000                                 |       | 1,514,500 |   | 1,498,000 |   |
|                     |       |                                      |       |   |   |   |   |
| Deferred:                |       |                                      |       |   |   |   |   |
| Federal                  |       | 23,200                                    |       | (37,000 | ) | (69,700 | ) |
| State                    |       | 4,500                                     |       | (6,500 | ) | (12,300 | ) |
|                     |       | 27,700                                    |       | (43,500 | ) | (82,000 | ) |
|                     |       |                                      |       |   |   |   |   |
| Total income tax expense |       | $                                         | 1,407,700  |   | $ | 1,471,000 |   | $ | 1,416,000 |   |

 

39

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The following reconciles ourexpected income tax expense utilizing statutory tax rates to the actual taxexpense:

 
| ** **                                        | ** ** | **As of Fiscal Year End February 29(28),** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Tax expense  at federal statutory rate            |       | $                                                                        | 1,270,500  |   | $ | 1,319,000 |   | $ | 1,297,000 |   |
| State income  tax–net of federal tax benefit |       | 147,600                                                                  |       | 154,000 |   | 151,000 |   |
| Other                                             |       | (10,400                                                                  | )          | (2,000 | ) | (32,000 | ) |
|                                              |       |                                                                     |       |   |   |   |   |
| Total income  tax expense                         |       | $                                                                        | 1,407,700  |   | $ | 1,471,000 |   | $ | 1,416,000 |   |

 

We file our tax returns inthe U.S. and certain state jurisdictions. The earliest years’ tax returns filed by us that are still subject toexamination by the tax authorities in the major jurisdictions are as follows:

 

| **Jurisdiction** | ** ** | **Fiscal Year** | ** ** |
|------------------|------------|-----------------|------------|
| U.S.             |       | 2007            |       |
| Oklahoma         |       | 2005            |       |

 

**5.**       EMPLOYEE BENEFIT PLAN

** **

Wehave a profit sharing plan that incorporates the provisions of Section 401(k) ofthe Internal Revenue Code.  The 401(k) plancovers substantially all employees meeting specific age and length of servicerequirements.  Matching contributions arediscretionary and amounted to $64,700, $69,300, and $65,100 in the fiscal yearsended February 29, 2008, February 28, 2007 and February 28,2006, respectively.

 

**6.**       NOTE PAYABLE TO BANK

** **

Wehave a $5,000,000 revolving credit agreement, with interest payable monthlyat prime minus 0.75% (5.25% at February 29, 2008), collateralized bysubstantially all of our assets and maturing on June 30, 2008.  Available credit under the revolving creditagreement was $5,000,000 at February 29, 2008 and $5,000,000 at February 28,2007.  This agreement also contains a new provision for our use of the Bank’sletters of credit.  The Bank agrees toissue, or obtain issuance of commercial or stand-by letters of credit providedthat no letters of credit will have an expiry date later than June 30,2008 and that the sum of the line of credit plus the letters of credit wouldnot exceed the borrowing base in effect at the time. The agreementcontains provisions that require us to maintain specified financial ratios,restrict transactions with related parties, prohibit mergers or consolidation,disallow additional debt, and limit the amount of compensation, salaries,investments, capital expenditures and leasing transactions.  Weintend to renew the bank agreement or obtain other financing uponmaturity.

 

Wehad no borrowings outstanding on the above revolving credit agreement at February 29,2008 and February 28, 2007.

 

**7.**       COMMITMENTS

** **

At February 29, 2008,wehad outstanding purchasecommitments totaling approximately $3,046,700.

 

**8.**       CAPITAL STOCK, STOCK OPTIONSAND WARRANTS

** **

The Board of Directorsadopted the 1992 Incentive Stock Option Plan (the “1992 Plan”) in June of1992, which authorized us to grant up to1,000,000 stock options.  The 1992 Planexpired in June of 2002 upon which the Board of Directors adopted the 2002Stock Option Plan (the “2002 Plan”).  The2002 Plan also authorized us to grant up to1,000,000 stock options.

 

Options granted under the1992 Plan and 2002 Plan (collectively the “Incentive Plans”) vest at date ofgrant and are exercisable up to ten years from the date of grant.  The exercise price on options granted isequal to the market price at the date of grant. Options outstanding at February 29, 2008 expired beginning in May 2008through March 2014.

 

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A summary of the status ofour Incentive Plans as of February 29, 2008, February 28, 2007 and February 28,2006, and changes during the years then ended is presented below:

 
| ** **                  | ** ** | **February 29, 2008** | ** ** | **February 28, 2007** | ** ** | **February 28, 2006** | ** ** |
|-----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | ** **                 | ** ** | **Average**                | ** ** | ** **                 | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                  | ** ** | ** **                 | ** ** | **Exercise**               | ** ** | ** **                 | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                  | ** ** | **Shares**                 | ** ** | **Price**                  | ** ** | **Shares**                 | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                        |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Outstanding  at             |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Beginning of  Year          |       | 250,200                    |       | $                          | 3.69       |                       | 270,200    |   | $ | 3.62 |   | 279,700 |   | $ | 3.68 |   |
|                        |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Granted                     |       | —                     |       | —                     |       | —                     |       | — |   | — |   | — |   |
|                        |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Exercised/canceled          |       | (15,000                    | )          | (4.00                      | )          | (20,000                    | )          | (2.80 | ) | (9,500 | ) | (5.20 | ) |
|                        |       |                       |       |                       |       |                       |       |   |   |   |   |   |   |
| Outstanding  at End of Year |       | 235,200                    |       | $                          | 3.67       |                       | 250,200    |   | $ | 3.69 |   | 270,200 |   | $ | 3.62 |   |

 

Thefollowing table summarizes information about stock options outstanding at February 29,2008:

 
| ** **                | ** ** | **Number**                    | ** ** | **Weighted Average** | ** ** |
|---------------------------|------------|-------------------------------|------------|---------------------------|------------|
| ** **                | ** ** | **Outstanding**               | ** ** | **Remaining**             | ** ** |
| **Weighted Average** | ** ** | **at February 29,** | ** ** | **Contractual**           | ** ** |
| **Exercise Price**   | ** ** | **2008**                      | ** ** | **Life (Years)**     | ** ** |
|                      |       |                          |       | ** **                |       |
| $                         | 2.19       |                          | 84,000     |                      | 2.0        |   |
| $                         | 2.50       |                          | 10,000     |                      | 1.0        |   |
| $                         | 3.81       |                          | 5,000      |                      | 0.5        |   |
| $                         | 4.63       |                          | 135,200    |                      | 0.3        |   |
| $                         | 10.00      |                          | 1,000      |                      | 6.0        |   |
|                      |       | 235,200                       |       |                      |       |

 

All options outstanding areexercisable at February 29, 2008.

 

No options were grantedduring the three fiscal years ended February 29, 2008.

 

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**9.**       QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)

** **

The following is a summaryof the quarterly results of operations for the years ended February 29,2008, February 28, 2007 and February 28, 2006.

** **
| ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **       | ** ** | **Basic**     | ** ** | **Diluted**   | ** ** |
|-----------------|------------|--------------|------------|------------------|------------|------------------|------------|---------------|------------|---------------|------------|
| ** **      | ** ** | **Net**      | ** ** | ** **       | ** ** | ** **       | ** ** | **Earnings**  | ** ** | **Earnings**  | ** ** |
| ** **      | ** ** | **Revenues** | ** ** | **Gross Margin** | ** ** | **Net Earnings** | ** ** | **Per Share** | ** ** | **Per Share** | ** ** |
| **2008**        |       |         |       |             |       |             |       |          |       |          |       |
| First  quarter  |       | $            | 7,606,400  |             | $          | 4,899,900        |       | $             | 585,300    |          | $          | 0.16 |   | $ | 0.15 |   |
| Second  quarter |       | 6,218,500    |       | 3,916,500        |       | 379,800          |       | 0.10          |       | 0.10          |       |
| Third  quarter  |       | 9,903,500    |       | 6,514,600        |       | 876,800          |       | 0.23          |       | 0.23          |       |
| Fourth  quarter |       | 6,792,300    |       | 4,439,500        |       | 482,500          |       | 0.13          |       | 0.12          |       |
|            |       |         |       |             |       |             |       |          |       |          |       |
| Total year      |       | $            | 30,520,700 |             | $          | 19,770,500       |       | $             | 2,324,400  |          | $          | 0.62 |   | $ | 0.60 |   |
|            |       |         |       |             |       |             |       |          |       |          |       |
| **2007**        |       |         |       |             |       |             |       |          |       |          |       |
| First  quarter  |       | $            | 8,107,000  |             | $          | 5,227,600        |       | $             | 696,600    |          | $          | 0.19 |   | $ | 0.18 |   |
| Second  quarter |       | 6,484,400    |       | 3,967,900        |       | 424,000          |       | 0.11          |       | 0.11          |       |
| Third  quarter  |       | 9,820,500    |       | 6,398,900        |       | 798,200          |       | 0.21          |       | 0.21          |       |
| Fourth  quarter |       | 6,991,600    |       | 4,534,500        |       | 488,300          |       | 0.13          |       | 0.12          |       |
|            |       |         |       |             |       |             |       |          |       |          |       |
| Total year      |       | $            | 31,403,500 |             | $          | 20,128,900       |       | $             | 2,407,100  |          | $          | 0.64 |   | $ | 0.62 |   |
| ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **       | ** ** | ** **    | ** ** | ** **    | ** ** |
| **2006**        |       |         |       |             |       |             |       |          |       |          |       |
| First  quarter  |       | $            | 8,226,700  |             | $          | 5,221,900        |       | $             | 745,200    |          | $          | 0.20 |   | $ | 0.19 |   |
| Second  quarter |       | 6,794,100    |       | 4,054,900        |       | 394,800          |       | 0.11          |       | 0.10          |       |
| Third  quarter  |       | 9,683,000    |       | 6,292,800        |       | 739,100          |       | 0.20          |       | 0.19          |       |
| Fourth  quarter |       | 7,085,100    |       | 4,568,100        |       | 519,300          |       | 0.14          |       | 0.13          |       |
|            |       |         |       |             |       |             |       |          |       |          |       |
| Total year      |       | $            | 31,788,900 |             | $          | 20,137,700       |       | $             | 2,398,400  |          | $          | 0.64 |   | $ | 0.62 |   |

 

**10.**     BUSINESS SEGMENTS

** **

Wehave two reportable segments: Publishing and Usborne Books at Home (“UBAH”)which are business units that offer different methods of distribution todifferent types of customers.  They aremanaged separately based on the fundamental differences in their operations.

 

·      The Publishing Divisionmarkets its products to retail accounts, which include book, toy and giftstores, school supply stores and museums, through commissioned salesrepresentatives, trade and specialty wholesalers and an internal telesalesgroup.

 

·      UBAH markets its productline through a nationwide network of independent sales consultants using acombination of direct sales, home shows and book fairs.  The UBAH Division also distributes to schooland public libraries.

 

The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies.  We evaluate segment performance based on earnings(loss) before income taxes of the segments, which is defined as segment netsales reduced by direct cost of sales and direct expenses. Corporate expenses,depreciation, interest expense and income taxes are not allocated to thesegments, but 

 

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are listed in the “other”column.  Corporateexpenses include the executive department, accounting department, informationservices department, general office management and building facilitiesmanagement.  Our assets and liabilities arenot allocated on a segment basis.

 

Information by industrysegment for the years ended February 29, 2008, February 28, 2007 and February 28,2006 is set forth below:

** **

**NET REVENUES**

** **
| ** **     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**   | ** ** |
|----------------|------------|----------|------------|----------|------------|------------|------------|
| **Publishing** |       | $        | 8,144,100  |     | 8,121,100  |       | $          | 8,403,700 |   |
| **UBAH**       |       | $        | 22,376,600 |     | 23,282,400 |       | $          | 23,385,200 |   |
| **Other**      |       | $        | —     |     | $          | —     |       | $ | — |   |
| ** **     |       |     |       |     |       |       |       |
| **Total**      |       | $        | 30,520,700 |     | $          | 31,403,500 |       | $ | 31,788,900 |   |

 

**EARNINGS (LOSS) BEFORE INCOME TAXES**

** **
| ** **     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006**  | ** ** |
|----------------|------------|----------|------------|----------|------------|-----------|------------|
| **Publishing** |       | $        | 2,507,600  |     | 2,508,400  |      | $          | 2,833,300 |   |
| **UBAH**       |       | $        | 4,856,800  |     | 4,863,500  |      | $          | 4,743,000 |   |
| **Other**      |       | $        | (3,632,300 | )        | (3,493,800 | )         | $          | (3,761,900 | ) |
| ** **     |       |     |       |     |       |      |       |
| **Total**      |       | $        | 3,732,100  |     | $          | 3,878,100 |       | $ | 3,814,400 |   |
|                |            |          |            |          |            |           |            |  |  |  |

 

**11.**     STOCK REPURCHASE PLAN

** **

In April 2004 the Boardof Directors authorized usto purchase upto 500,000 additional shares of our common stock under a plan initiated in1998.  This plan has no expirationdate.  During fiscal year 2008 wepurchased 81,059 shares of common stock at an average price of $6.23 per sharetotaling approximately $504,900.  Themaximum number of shares that may be repurchased in the future is 79,000.

 

**12.**     SUBSEQUENT EVENT

** **

On April 28, 2008, weannounced that we would pay a $0.30 per share regular dividend and a $.10 pershare special dividend on May 19, 2008 to shareholders of record as of May 9,2008.  This dividend was paid on thestated date.

 

**13.**     OTHER INCOME

** **

            During fiscal year 2007, we entered into a Plan ofReorganization and Financing Agreement with a company in Chapter 11 bankruptcyas a prelude to acquiring that bankrupt company.  We were not the successful bidder in anauction held by the U.S. Bankruptcy Court, but the Court awarded us a $250,000breakup fee which is included in other net income.

 

******

 

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